* Local bank suing local govt-controlled property firm over
* Bank, property firm based in same city; Borrower owns bank
* Bank denies the firm is a LGFV, contradicts media, analyst
* Highlights divergence of interests between banks, local
(Updates with additional detail about the sued company)
By Pete Sweeney
SHANGHAI, July 2 A Chinese bank is suing a local
government-controlled property investment firm 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 as local
governments confront 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 the
Urban Construction and Comprehensive Development Company of
Licheng District over unpaid debt.
The bank said the company had failed to make payments on a
35.4 million yuan ($5.71 million) outstanding loan, along with
6.1 million yuan in unpaid interest. The Commonwealth Bank of
Australia currently owns 20 percent of Qilu Bank's total shares.
"To the best of our knowledge, this is the first official
disclosure of a LGFV (local government financing vehicle)
default on a bank loan," wrote Nomura analysts in a research
note distributed to clients on Monday.
The Licheng District company could not be reached for
comment, while Qilu Bank said on its website on Wednesday that
the entity was not a financing vehicle as Nomura and domestic
media had reported, but rather a property development company
established by the local government.
"They are totally independent and should be responsible for
their own profits and losses," the statement said, adding that
the company had begun rolling over its loans when it got in
trouble in 2008.
LGFVs in China are usually defined as vehicles created
exclusively for the purpose of fundraising on the behalf of
local governments, which are legally prevented from raising
money on their own behalf. A company controlled by a local
government, on the other hand, is considered a commercial entity
in its own right.
The distinction, however, can be a technical one and in
reality lines can be blurred.
While LGFVs are considered to be implicitly guaranteed by
the government by many investors, they are not formally
guaranteed. At the same time, local government-connected
commercial entities -- such as solar power companies -- have
operated without fear of bankruptcy for years, seeing their
debts rolled over repeatedly.
Much of China's massive debt overhang and its accompanying
industrial overcapacity was incurred by local governments using
entities under their direct or indirect control to borrow
heavily from the banking system at low rates. Such corporations
were able to conduct investment and business activities on
behalf of local governments, not all in the public interest, on
the tacit assumption that the taxpayer was ultimately on the
hook. Many dabbled in real estate, battened on subsidies to
incubate strategic industries, and otherwise helped contribute
to China's industrial overcapacity and its real estate asset
Until recently domestic banks were willing to roll over
their debts indefinitely -- a strategy analysts say worked fine
so long as China maintained double-digit economic growth -- but
the Qilu case is an example of a bank becoming less
Chinese banking sources agreed that while de-facto defaults
by such companies 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 company is still 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 loans and more
sceptical about local governments' readiness to bail out their
failing financing arms.
($1 = 6.2000 Chinese Yuan Renminbi)
(Additional reporting by Lu Jianxin and the Shanghai Newsroom;
Editing by Tomasz Janowski)