* China plans to shift $300-$470 bln in local govt debt
* Local govt debt a "time bomb"; plan positive for economy -
* Concerns still linger over impact of post-crisis lending
* China big bank shares move in line with market
(Adds more analyst comment, closing share prices)
By Kelvin Soh and Terril Yue Jones
HONG KONG/BEIJING June 1 China's top banks and
its economy should benefit from a plan by Beijing to write off
hundreds of billions of dollars in local government debt,
although uncertainty over sharing the costs and concerns about
the impact of the country's lending spree remain.
China's banking regulator plans to shift 2-3 trillion yuan
($300-$470 billion) in debt off the books of local governments,
Reuters reported on Tuesday, reducing the risk of a wave of
defaults that would threaten the stability of the world's
second-biggest economy. [ID:nL3E7H101J]
The sweeping plan underscores China's desire to act before
the bad debt problem facing local governments becomes untenable,
analysts said on Wednesday.
"Local government debt is a time bomb in the longer run, so
it's positive for the whole economy," said Stanley Li, a Chinese
banking analyst with Mirae Asset Securities.
Many local governments in China set up special financing
vehicles to get around rules forbidding them from borrowing
directly from banks.
China's top banks provided many of the loans as part of a
huge economic stimulus programme launched by Beijing in late
2008 to counter the global financial crisis.
Chinese authorities had worked out that local governments
had borrowed around 10 trillion yuan, Reuters said in its report
Local and provincial administrations may default on around 2
trillion yuan of loans, many of which were used fund uneconomic
real estate and infrastructure projects, Chinese media have
"There has been concern over asset quality risk, especially
(to the financing vehicles)," said Victor Wang, an analyst with
Macquarie Securities. "I think it's the right move -- it removes
uncertainty, and helps the banks operate on a more clear and
Industrial and Commercial Bank of China
and China Construction Bank are the world's
two biggest banks by market capital. Agricultural Bank of China
and Bank of China are
Nos. 3 and 4 in China and among the world's top ten.
None of the four banks had immediate comment on the
Government assumption of the debt would take a bulk of the
burden off the books of the major banks at a time when China's
red-hot economy has begun to slow.
"We believe this would be a general positive for the Chinese
banks as we consider their local government financing vehicles'
exposures to be the greatest risk to the banks' credit quality,"
Bernstein Research Analyst Mike Werner wrote in a research note.
There will be some "short-term pain" and banks'
profitability this year could be hit by 20 percent, depending on
how the loss-sharing is split, Mirae's Li said.
The overhaul includes the central government paying off some
of the local government loans, while some state-controlled banks
would be forced to take losses on the sour debt, people familiar
with the plan told Reuters.
Hong Kong-listed shares of China's big four banks moved
largely in tandem with the broader market on Wednesday. ICBC
closed down 0.3 percent and CCB was down 0.8 percent,
Agriculture Bank of China was down 2.7 percent and Bank of China
The scheme would be the second time China has stepped in to
reshape its banking system since the late 1990s.
Then, with the Chinese banking system almost insolvent after
decades of government-directed lending, the authorities
transferred the banks' bad debts to asset management companies
backed by sovereign bond issues in preparation for their
The government eventually got its money back when ICBC and
the others listed in Hong Kong and Shanghai, through
multi-billion dollar IPOs in the two cities.
"The previous clean-up was different because the government
eventually got its money back from investors like you and me,"
said Dorris Chen, an analyst at BNP Paribas in Shanghai. "It's
not sure how the government can get its money back this time."
Getting bad debts out of the system allows banks both big
and small to keep the lending flow going. The fear is that bad
debts over time will pile up if economic growth slows.
"We've always felt that such rapid loan growth in the past
few years will eventually bring trouble to the sector," Standard
& Poor's analyst Liao Qiang said.
"It was probably wrong to use the banking system to push the
country out of the global financial crisis anyway, and this is
probably one of the side effects we have to live with."
(Additional reporting by Kevin Yao in BEIJING; Editing by
Michael Flaherty and Lincoln Feast)