(Repeats article first published late on Tuesday. No changes to
* Local bank suing local govt funding vehicle over bad debt
* Bank, financing vehicle based in same city; LGFV owns bank
* Could be first official admission of an LGFV
* Highlights divergence of interests between banks, LGFVs
By Pete Sweeney
SHANGHAI, July 1 A Chinese bank is suing a local
government financing vehicle over a bad loan in a rare public
display of a deepening rift between lenders and borrowers in
China's murky $3 trillion local debt market.
The unusual step also highlights growing strains in the
market confronted by slowing economic growth and a property
sector that has started to cool off after decades of runaway
Qilu Bank, based in the city of Jinan in the coastal
province of Shandong, announced in its 2013 annual report --
published online in Chinese and English -- that it was suing a
local government financing vehicle (LGFV) over unpaid debt.
The bank said the Urban Construction and Comprehensive
Development Company of Licheng District failed to make payments
on a 35.4 million yuan ($5.71 million) outstanding loan, along
with 6.1 million yuan in unpaid interest.
"To the best of our knowledge, this is the first official
disclosure of a LGFV default on a bank loan," wrote Nomura
analysts in a research note distributed to clients on Monday.
Neither Qilu Bank nor the company in question answered phone
calls requesting comment.
Much of China's massive debt overhang and its accompanying
industrial overcapacity was incurred by local governments using
such vehicles, known as LGFVs, to get around laws prohibiting
local governments from borrowing directly. These entities,
financed by local banks, were linked to the local governments
and conducted investment activities on their behalf, dabbling in
real estate, battening on subsidies to strategic industries like
solar power, and otherwise helping contribute to China's
industrial overcapacity and its real estate asset price bubble.
Until recently banks have been willing to roll over LGFVs'
debts indefinitely, avoiding write-downs and keeping reported
non-performing loan (NPL) ratios at levels well below what
analysts considered realistic -- a strategy analysts say worked
fine so long as China maintained double-digit economic growth.
Chinese banking sources agreed that while de-facto defaults
by LGFVs are common, the public nature of the disclosure was
unusual given the fraternal relationship between the two
entities. Both are headquartered in Jinan, and according to the
Qilu report the Licheng District LGFV is one of its
shareholders, holding 0.08 percent of its shares.
"LGFV defaults are to be expected and are inevitable," said
a loan officer at a Shanghai-based Chinese bank, who spoke on
condition of anonymity, but said in most cases the defaults were
hidden from public view using accounting methods.
However, pressured by regulators to clean up their books,
banks have grown less willing to roll over the loans and more
sceptical about local governments' readiness to bail out failed
their financing arms.
A senior bond trader at a major Chinese state-owned bank in
Shanghai noted that while investors still largely considered
debt issued by provincial-level financing vehicles to be
effectively guaranteed, that no longer held true for lower level
"Bonds issued by provincial LGFVs are privately guaranteed
by related local governments, but I don't think lower-level
LGFVs' debt is guaranteed in a similar way."
Beijing has said it is trying to move away from the
investment-intensive economic model that spurred the development
of local financing vehicles, and the central bank announced in
January that it would move to eliminate those with "unclear
functions" and unsustainable finances.
The local government financing vehicle bond market has yet
to experience a public default. Beijing did allow China's first
default of a publicly traded bond in March, and since then other
firms have also defaulted, but none of them have been operating
under presumed government guarantees the way LGFVs do.
($1 = 6.2000 Chinese Yuan Renminbi)
(Additional reporting by Lu Jianxin and the Shanghai Newsroom;
Editing by Tomasz Janowski)