UPDATE 2-China tightens grip on loans to local govt financing firms
* Commercial banks must strictly control lending volume this year
* Keep outstanding loans to LGFVs this year unchanged from end 2011
* Banks should be prudent in buying bonds issued by LGFVs (Adds comments from CBRC Jiangsu branch official)
By Aileen Wang and Kevin Yao
BEIJING, March 14 (Reuters) - China's banking regulator has unveiled fresh steps to tighten control of bank lending to local government financing vehicles (LGFVs), according to draft rules seen by Reuters on Thursday, in a move to manage risk from local governments' huge debt pile.
Under the guidelines issued by the China Banking Regulatory Commission (CBRC), commercial banks must strictly control the level of lending to LGFVs this year and closely monitor repayments of loans, to ward off debt defaults.
The new guidelines step up oversight of lending, repayment and refinancing, marking a further increase in the CBRC's efforts to diffuse potential risks stemming from LGFVs.
"Each bank and CBRC's local branch must set up a monitoring system to check the monthly amount of matured loans and where the repayment came from," said the draft rules.
"In cases where loans cannot be paid back in time, or where new loans are used to repay old ones, banks must report this to regulators immediately to avoid major default events," it added.
In the draft guidelines, the CBRC has told banks to keep outstanding loans to LGFVs this year unchanged from the level at the end of 2011. Local media have reported that figure to be around 9 trillion yuan ($1.46 trillion).
It also ordered banks to strictly control the proportion of such loans in their total lending, with the share of this year capped at a level no higher than that of 2012.
The CBRC reiterated that banks should be prudent in buying bonds issued by LGFVs. It bans lenders from guaranteeing them.
The banking watchdog said it would introduce a wider gauge to cover all debt incurred by local financing vehicles through bank loans, corporate bonds, medium- and short-term notes, trust loans, wealth management products, to strengthen supervision and prevent risks.
The launch of this new yardstick helps address concerns of some local officials that the swelling funding from non-bank channels may add new risks to debt-laden local governments.
Yu Xuejun, the head of CBRC's Jiangsu branch, called on the banking regulator to keep on high alert against debt risks stemming from other financing options outside the formal bank loans, such as bond issuance and trust projects.
"Local government financing vehicles have been playing a positive role in funding the construction of basic infrastructures as well as offsetting the impact of the global financial crisis," Yu told Reuters on the sideline of the annual parliament meeting in Beijing.
"But there is a huge systemic risk looming, which requires a consistent effort to defuse," he added.
The draft guideline also said the regulator would continue to support lending to provincial governments as well as unfinished projects, while scaling back new loans to projects of city or county-level governments that have low fiscal revenues.
Banks must guarantee that new loans extended to local financing firms in 2013 will be channelled to key projects in line with Beijing's national goals, such as affordable housing projects, irrigation and other agricultural projects approved by the central government, the document said.
China's local governments had amassed debt of 10.7 trillion yuan by the end of 2010 in part to fund spending mandated in a 4 trillion yuan fiscal stimulus programme launched by Beijing in 2008 at the height of the global financial crisis.
Analysts at Credit Agricole CIB in Hong Kong believe the government's budget for 2013, which was published last week, indicated a 61.3 percent jump in central government fund transfers to help shore up local government finances this year.
"Our analysis suggests that core transfers - other than tax refunds and those for programmes co-financed with the central government - are set to rise by a huge amount of 933 billion yuan to 2.45 trillion yuan," the bank wrote in a note to clients.
But the bank says that will still leave local governments with a deeper deficit in 2013 than in 2012, given declining revenues from land sales as a consequence of Beijing's nationwide campaign to snuff out real estate speculation.
"While lower dependence on land sales reduces systemic risks in the long run, in the short term it puts pressure on local government finances and it has forced central government to pick up the tab for its real estate tightening policies," Credit Agricole said.
($1 = 6.2138 Chinese yuan) (Additional reporting by Nick Edwards in Beijing and Samuel Shen in Shanghai; Editing by Jacqueline Wong)
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