China's banks must reassess local goverment lending risks
China's most senior banking regulator has told the country's banks to submit reports about their lending to local government amid concerns that the industry faces a looming bad debt crisis.
Liu Mingkang, chairman of the China Banking Regulatory Commission told an Asian economic forum over the weekend that banks must reassess their loans on "a project-by-project" basis.
"By the end of this coming June, all of the banks are required to submit comprehensive reassessment reports to us about that area's exposure," he said.
His comments come as fears mount that China's $600 billion stimulus package that has kept the economy powering ahead despite the global economic crisis has led to reckless investment decisions through off-balance sheet financing vehicles. About three-quarters of the stimulus package has been disbursed to these vehicles financing infrastructure projects and real estate developments. Some analysts believe that these investments could end up generating at least $90 billion in new non-performing loans leading to a banking bailout and the bankruptcy of hundreds of indebted municipal authorities.
There’s no doubt that a massive non-performing loans crisis will ensue. Euromoney reveals the true extent of the problems facing China’s financial markets:
The deployment of China’s 2008/09 economic stimulus package ignored the mistakes made in the country’s previous attempts to revitalize the market. Local authorities were flooded with cash, prompting reckless investment decisions.