Banking

Beijing confirms bank loan roll over, Wuhu reverses property gambit

China has instructed its banks to roll over loans to local governments, confirming an effective bailout of Local Government Financial Vehicle (LGFV) debt that has been underway since at least November last year (CC Nov 3 2011 Financial China). The confirmation, reported by the Financial Times today, provides some context to Premier Wen Jiabao’s comment yesterday that Beijing will “fine-tune” its economic policy this year. We think the fine-tuning will mainly come in the shape of a further loosening in liquidity policy.

Liquidity loosening underway to forestall defaults

The authorities have begun 2012 by showing an intent to keep defaults to a minimum in both property and LGFV segments to avoid systemic risk.

Default risks goad Beijing into loosening curbs

During 2012 authorities are set to relax restrictions they have imposed on bank support for local government financing vehicles (LGFVs) and on the property market because the rising risk of defaults among LGFV and trust companies will oblige Beijing into a softer stance. Some aspects of this predicted relaxation may be announced and some, such as a few recent initiatives, may be communicated through largely confidential “window guidance” from regulators to financial institutions.

Financial sunshine and shade

Shadow lending is ebbing but this does not herald a harsh government crackdown. More likely is a gradual process aimed at reasserting Beijing’s control.

October loans surge, officials embrace private lending

Key cyclical and structural changes are underway in China's financial system. New loans from the formal banking system surged in October, confirming Beijing's looser liquidity policy (CC Sept 8 Macro View). Credit extended from the shadow banks, however, slipped appreciably during the month, according to a China Confidential survey, and we think they will remain subdued in November. Finally, officials are giving their blessing to state-sanctioned private lenders – as distinct from unregistered underground banks – in what promises to be an important liberalisation of state financial control.

Into the rescue phase

Several signs are pointing to a continuation of the rescue phase in economic policy as inflationary pressures ease.

Transport investment stalls

The once-firm bond between state banks and state-owned transport infrastructure builders is fraying, throwing a key motivator of economic growth into doubt.

China buys bank shares to bolster confidence

Central Huijin Investment, an arm of China's $400bn sovereign wealth fund, said on Monday that it had bought shares in the "big four" state banks. We think the move was aimed at bolstering confidence both in the banks, which suffered an Rmb 420bn outflow of deposits in the first half of September, and in the wider domestic stock market.

Highway loans are triggers for LGFV defaults

Short-term loans issued to finance longer-term projects in the heady days of China's 2009 stimulus package are returning to haunt the banks.

Wenzhou credit crisis

Executives are fleeing to avoid "usurious" lending rates within the region's shadow banking system.

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09 Feb 2012

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