China's regulators intend to move 2-3 trillion yuan ($308-463 billion) of debt off the books of local governments, paying off some and forcing some of its "Big Four" banks to absorb some losses. The move is intended to restore confidence in Chinese banks in the wake of the economic stimulus package launched in late 2008 by Beijing as a response to the global financial crisis.
Reuters reports that bad debt lurks in local government financing vehicles, which are hybrid company/government establishments that were used by local governments to circumvent official restrictions on borrowing. Totals may run as high as $2 trillion yuan, out of a total of about $10 trillion yuan in total debt. The stimulus brought about unrestricted lending during the crisis, and the resulting pile of bad debt, say analysts, could pose a major risk to the Chinese economy, particularly in the midst of an economic slowdown.
However, if instead of allowing local governments to default, Beijing steps in to absorb some of the losses, analysts do not expect broad problems with banks. Part of the plan also includes allowing provincial and municipal governments to sell bonds, which will provide them with more transparent sources of funding and shore up their balance sheets.
One anonymous source cited in the report said that the process is expected to begin in June and be complete by September; another unnamed source said it would require more time. Three government bodies, the bank regulator, the Finance Ministry and the National Development and Reform Commission, China's state economic planner, are expected to conduct the process.
Banks will be required to take a hit, according to the first source, who was quoted saying, "It's to rescue local government finances, not banks. It's different in nature from the bailout of the four big [state] banks in the late 1990s before they listed [on stock markets]." The source referred to a setup in 1999 of asset management companies by Beijing that cleared 1.4 trillion yuan off big state-owned banks' books; the bad debt was a result of political lending that took place over decades.
