Bad loans set to be restructured and gradually resolved, experts predict

BEIJING - The China Banking Regulatory Commission is considering long-term extensions of bank loans to local governments, a CBRC official told China Daily on Monday on condition of anonymity.

The official said that policy details would likely be released later this month.

A debt rollover could give the central government breathing space to deal with the huge debt load triggered by stimulus spending during the 2008 global financial crisis, analysts said.

As of the end of 2010, total local government debt stood at 10.7 trillion yuan ($1.7 trillion), data from the National Audit Office show. About 4.46 trillion yuan was scheduled for repayment this year.

The CBRC declined to say how much local government debt might be rolled over. However, the Financial Times quoted an anonymous source as saying on Sunday that maturing debt might be extended for as much as four years.

Wang Tao, chief economist with UBS AG in China, wrote in an email to China Daily that extensions of local-government debt started last year and "will continue".

According to Wang, about 20 to 30 percent of the total local government debt is unlikely to be repaid, but that might not lead to a massive bailout by the central government.

"The bad debt will be restructured and gradually resolved over the next few years," Wang said. "The authorities may forgo some dividends, use tax cuts and protect banks' interest margins to deal with the bad loans."

Industrial Bank Co Ltd chief economist Lu Zhengwei was not worried about banks' solvency. "The concentration of loan maturity dates is expected to increase the pressure on their cash flow. But local governments still have the ability to pay back the loans."

Local governments' fiscal revenue totaled 5.24 trillion yuan in 2011, according to the Ministry of Finance, which was enough to cover maturing loans.

Also, the value of State-owned enterprise assets is estimated to be as high as 30 trillion yuan, which would be sufficient as collateral for the loan payments, Lu said.

Although the local government debt situation isn't at a stage that would spark a crisis for the world's second-largest economy, the longer the delay in repayment, the heavier the price to be paid by banks and the government, according to analysts.

"Forbearance" on debt repayment might support Chinese banks in the short run, but it could have negative long-term implications, said Liao Qiang, an analyst with rating agency Standard & Poor's Financial Service LLC.

"However, regulators will not just watch local debt platforms collapse," Liao said. "More debt restructuring could emerge in the coming months."