(Adds analyst comment in third paragraph.)
Jan. 12 (Bloomberg) -- Signs that Chinese lenders will postpone losses on trillions of yuan of loans made to local governments may undermine investor confidence in the banking sector, Standard & Poor’s said today.
The country’s regulator may permit banks to reschedule loans to local government financing vehicles, which would be a “backward step” and threaten a decade of increasing transparency, according to an e-mailed report from the ratings company today.
“Such a policy change, if it materializes, could undermine the Chinese banking sector in the long run despite its possible short-term relief,” Liao Qiang, a Beijing-based director of financial institution ratings for S&P, said in a conference call after the report was released.
Thousands of local governments borrowed money to fund building projects central to economic stimulus steps started in November 2008. Financing companies enable provinces, cities, counties and townships to bypass rules barring direct bond sales. Local governments had debt totaling 10.7 trillion yuan ($1.69 trillion) as of the end of 2010, according to a June national audit.
“Refinancing risks for heavily leveraged financing platforms are looming large,” Liao said.
Around 30 percent of loans to local government companies may sour in the next three years should the governments not extend any support, according to the report. The ratio of non- performing loans in China’s banking system may rise to around 10 percent from the current 1 percent, S&P said.
“Creditors have now started to doubt the capacity and willingness of local governments to honor their debts, given the sheer size of the debt and unevenness of fiscal strength across regions,” the report said.
The nation’s banking regulator is under pressure to ease rules on local lending after tightening them in the past few years, S&P’s Liao said.
Zhou Mubing, vice chairman of the China Banking Regulatory Commission, indicated in October that the regulator may allow banks to reschedule eligible loans to local government financing vehicles, the report said.
A call to the banking regulator today seeking comment on the report went unanswered.
As much as 3 trillion yuan of loans, or 5 percent of the banking sector’s total lending at the end of last year, may be eligible for extension, S&P said. That would reduce credit losses by 80 billion to 100 billion yuan each year for the next three years.
“Whether the government will continue to provide massive capital injections to those platforms to bail them out, this is a big issue and there’s a lot of uncertainty here,” Liao said. “This has led to a lot of creditor concern.”
--Henry Sanderson. Editors: Andrew Monahan, Beth Thomas
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