China local government debt facing 'serious' default risk: report

Chinese banks lent huge amounts of money to provincial financing vehicles for construction projects after Beijing called for nationwide efforts to spur the economy.

But now only 27 percent of projects financed by the loans are generating adequate cash flow for repayment, the Century Weekly said in its latest issue, citing the China Banking Regulatory Commission.

And 23 percent of the loans — or about 1.76 trillion yuan — face serious default risks, said the report.

The banking regulators, along with the banks that have the biggest exposure, will carry out detailed discussions with local governments starting in September about how to recoup the loans, the report said.

A spokeswoman at the banking regulator, which was also cited in a report on the issue by the Financial Times newspaper, declined to comment on the report when contacted by AFP.

China has powered out of the global crisis on the back of a stimulus package worth four trillion yuan and the state-backed bank lending, which saw new loans nearly double from the previous year to 9.6 trillion yuan in 2009.

The lending spree raised concerns in Beijing over a possible new crop of bad loans that could threaten the world's third-largest economy.

The State Council, or cabinet, warned earlier this year about the risks of lending to financing vehicles set up by local authorities to fund new roads, bridges and other projects.

Lending to such entities represented about 18 to 20 percent of total loans in the banking system, rating agency Standard & Poor's said last week.

“It's highly likely that some of these loans will turn bad over the next few years, given the questionable credit quality of many of the borrowers,” said Liao Qiang, a Beijing-based analyst at Standard & Poor's.

The roughly 1.76 trillion yuan at risk of default would be nearly four times the amount of all non-performing loans in Chinese banks as of the end of June, according to figures released by the bank regulator.

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