China on high alert for large-scale bad loans

21:37, February 25, 2010      

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Chen Jun, in preparation for his wedding, applied for bank loans to buy an apartment in downtown Nanjing, capital of Jiangsu Province. As a first-time home buyer, he thought he was entitled to a 30 percent discount on the loan's interest rate. He was surprised when all the banks knocked him back.

The practice of giving first-time home buyers a 30 percent discount on interests rate is fast disappearing as banks tighten lending to guard against bad loans. Most first-time home buyers can only get a 15 percent discount now.

Experts reckon the debate on how to prevent wide-spread default on loans will be one of the hottest at China's top legislative session to be held next week.

Concerns about bad loans have arisen after Chinese banks lent massive amounts that ended up in the property market, said Guo Tianyong, director of the China Banking Industry Research center with the Central University of Finance and Economics.

Lending to local governments' financing units is a concern, too, Guo added.

Some 2 trillion yuan, or 20.9 percent of China's new lending in 2009, found its way into the real estate sector, according to the People's Bank of China (PBoC), China's central bank.

A Bank of Communications report said local governments received financing from several banks through numerous financing units, making debt management chaotic as banks had difficulty tracking overall debt.

Chinese local governments cannot issue bonds, except through a limited pilot program launched in 2009. But they have set up more than 3,000 commercial units, and they borrow heavily through them.

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