May 15, 2015 / 6:57 AM / 4 years ago

China urges banks to keep funding local govt projects amid shadow banking crackdown

SHANGHAI (Reuters) - Chinese policymakers have ordered banks to keep lending to local government projects under construction, in a sign of concern that a crackdown on shadow financing has reduced municipalities’ spending and is hurting the economy.

Financial institutions which signed legally binding contracts before the end of 2014 to loan to money to construction projects backed by local government financing vehicles (LGFVs) must not stop lending or reduce the loan size, a document posted on the State Council website Friday said.

“It is necessary to support the financing needs of LGFV projects under construction and ensure an orderly continuation,” the regulators said in the document.

“This will help meet reasonable funding demand of the real economy, as well as effectively prevent and resolve fiscal and financial risk.”

The notice was jointly issued by the Ministry of Finance, the central bank and the banking industry watchdog.

While the government supports companies using a Public-Private-Partnership (PPP) model to obtain additional funding for such projects, local government finance departments can also use cash to support them, the document said.

Last year, Beijing began a crackdown on rapidly rising off-balance sheet fund-raising by local governments through so-called local government financing vehicles.

Instead, it has moved to expand the nation’s nascent official municipal bond market as a way to impose market discipline and control spending.

But the move appears to be creating problems in a slowing economy, as it raises the risk that some LGFV projects could be abandoned.

Some private funds are wary of becoming involved in them, with or without PPP financing model, local analysts have said.

The potential bankruptcy of a large number of projects could also cause serious problems for China’s fiscal stance and financial system, analysts say.

LGFV projects involving agricultural irrigation, cheap housing, urban subways must be given special support, among other supportive steps, the regulators said.

Beijing is struggling to rein in local government debt, estimated at around $3 trillion, without driving a slowing economy deeper into peril.

Local governments rushed to finance infrastructure and real estate projects, especially after the 2008/09 global financial crisis, in efforts to stimulate economic growth.

Reporting by Lu Jianxin and Nathaniel Taplin; Editing by Simon Cameron-Moore

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