Ministries deny systematic risks with local gov't loans

There are indeed certain risks for loans borrowed by local government financing platform enterprises, but the overall risk is currently controllable and will not lead to systematic risks, said senior officials from the Ministry of Finance and China Banking Regulatory Commission.

An official from the ministry said that the local financing platform enterprises have played roles in advancing local infrastructure construction and coping with the impact of the international financial crisis.

The related problems lie in the overly-rapid expansion of their debt and financing scale, non-standardized operating practices and the provision of loan guarantees by local governments in an irregular or indirect manner.

According to reports, the reasons behind the fast rise in loans involving local financing platform enterprises over recent years mainly lie in that local governments are attempting to complete the supporting work for the projects invested in by the central government. In response, the official said that the reasons do exist, but the more important reason is that the enterprises have sought to meet the financing demands of local governments for developing public welfare projects.

According to the statistical data, since the fourth quarter of 2008, the funds borrowed by local financing platform enterprises have largely been used to develop public welfare projects, such as public welfare housing, rural residents’ livelihood, infrastructure, social undertaking, environmental protection and independent innovation.

An official from the banking commission noted that the loans involving the local financing platform enterprises are indeed exposed to certain risks, but the overall risk is currently controllable and will not lead to systematic risks.

The incomplete data shows that the portion of new loans involving the local financing platforms to the total new loans in the first half of 2010 was about one third lower than that in 2009. Most related projects can produce stable and sufficient cash flow and are able to cover the principals and interests of the loans. Moreover, although some loans lack the source of funds for repayment, their risk status can be improved through risk mitigation measures.

The official from the banking commission added that the non-performing loan provision coverage ratio of financial institutions in China’s banking industry all are above 150 percent, and some even stand at 170 to 190 percent. This means that even if part of the loans involving local financing platform enterprises develop into non-performing loans or even losses, financial institutions will have enough provisions to offset them.

By People's Daily Online