China’s government financing vehicle problem

Bloomberg reported yesterday that “Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects” and that “The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year”.  The report notes that “Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry.”

These financing entities were apparently set up to circumvent legal limits on local government borrowing.   So these sums are in addition to the certainly large debts incurred through normal processes.  If the Bloomberg source is accurate, these off balance sheet losses would be equivalent to roughly one third of China’s foreign currency reserves.

1 Comment »

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