Beijing: China has ordered its banks to prop up insolvent provincial government projects, in the latest effort to support rapidly cooling growth and put off dealing with the mountain of debt that has built up in the past six years.
Authorities told financial institutions to keep lending to local government projects even if the borrowers are unable to make principal or interest payments on existing loans. The directive highlights the challenges facing China as it struggles to deal with the massive volume of debt left in the wake of its post-crisis stimulus, amid a sharply slowing economy.
The “suggestions on properly handling the issue of follow-up financing for existing projects undertaken by local government financing vehicles” was published by China’s cabinet, the State Council.
It explicitly banned financial institutions from cutting off or delaying funding to any local government project started before the end of last year and said any projects that are unable to repay existing loans should have their debt renegotiated and extended. Analysts said the move amounted to an official policy of “extending and pretending” that an estimated Rmb22 trillion ($3.54 trillion, Dh13 trillion) of questionable local government debt would eventually all be repaid.
“Much of the local government debt in China probably has a solvency problem but Beijing would like to pretend they have a liquidity problem instead and they want banks to keep lending in the vain hope that the borrowers will be able to repay one day,” said Chen Long, China economist at Gavekal Dragonomics in Beijing.
“This is a bit like the situation in Greece — the EU keeps lending to Greece in the hopes that one day the economy will recover and this debt will be repaid.”
In the aftermath of the global financial crisis China launched an enormous stimulus programme described by economists at the time as the biggest fiscal and monetary easing in history.
The bulk of the stimulus was in the form of credit from state banks, which funnelled loans to off-balance sheet subsidiaries of local authorities known as “local government financing vehicles”.
With Beijing’s approval, these entities allowed them to evade rules that technically barred local governments from running deficits and helped them launch countless infrastructure and real estate projects to kick-start growth.
The subsequent construction boom helped the Chinese economy rebound rapidly and also boosted growth in commodity exporters like Brazil and Australia but it also pushed debt up from about 130 per cent of GDP to more than 250 per cent today.
Analysts point out that almost every economy in history that has seen a debt build-up that rapid has experienced a financial or growth crisis. After years of virtually ignoring the problem, the government has started to explicitly recognise much of the debt, most notably with the launch of a debt-for-municipal-bond programme.
The directive also said that if existing projects could not be finished with the loans they already have then they should look first to private sector investors and then to local governments, who are required to raise the money by selling bonds.
Latest available public figures on local debt, published by the National Audit Office in mid-2013, show that of the Rmb17.9 trillion of debt outstanding at that time, Rmb2.8 trillion will mature this year alone.
That means the directive could lead to the rollover of as much as Rmb1.8 trillion of debt not covered in the bond swap programme.
Financial Times
