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How local governments’ debt crises will be the last straw for China’s small banks
- Banks might bear the brunt and carry bad LGFV loans because local governments will want to avert payment defaults on publicly traded bonds
- With local governments fully stretched to avert traditional payment defaults on bonds, ‘banks will get burned’, Lianhe Global analyst says
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The extension of credit for a local government-owned contractor in China’s southern Guizhou province that failed to pay some of its debt last year has led to concerns that the country’s smaller banks will become caught up in local governments’ debt crises and face increasing pressure to carry bad loans.
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Banks might bear the brunt because local governments will want to avert payment defaults on publicly traded bonds.
Zunyi Road and Bridge Construction Group, a local government financing vehicle (LGFV) – or firms controlled by local governments that raise money to invest in infrastructure – said in a filing to the Shanghai Stock Exchange on December 30 last year that banks had agreed to give it an extra 20 years to repay loans worth 15.6 billion yuan (US$2.2 billion). Moreover, the LGFV will not pay any of its creditors principal in the first 10 years of the plan.
And while one such firm might have a limited impact on banks’ balance sheets, if this becomes a trend, it could spell trouble for China’s lenders, particularly the smaller ones, analysts said.
“We may see other local governments follow Guizhou’s practice,” said Ben Yau, director at Lianhe Global, a major Chinese rating agency. “To support LGFVs with limited funding, other local governments might ask bank creditors to extend their loans.”
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