Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion)

On Bloomberg: China's Banks Said to See Risks in Loans

• By Bloomberg News - Jul 23, 2010
  
  Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.
  
  About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.
  
  Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.
  
  Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.
  
  Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said.
  
  Calls to the banking regulator’s press office in Beijing after business hours weren’t unanswered.
  
  Ensure Repayment
  
  China last month ordered local governments to ensure repayment and to concentrate on completing projects already under way. Financing units that fund only public projects and rely on the fiscal income of local governments to repay debt should stop spending, the State Council said June 13. Local governments have also been barred from guaranteeing loans taken by their financing vehicles.
  
  To minimize losses during this reform, the banking regulator has ordered lenders to create teams to discuss loan repayments with local governments and protect the rights of creditors, the person said.
  
  Chairman Liu said in April that inspectors would visit banks in the third quarter to check on loan reports that had to be submitted by the end of June. Those reports showed the banks had 7.7 trillion yuan of outstanding loans to the local financing vehicles at the end of last month, the person said.