Economy

Plan to write off local debt may boost banks

(Agencies)
Updated: 2011-06-02 08:18

HONG KONG - China's top banks are expected to receive a short-term boost from a plan to have Beijing write off local government debt. However, the move highlights concerns looming over the future impact of the country's lending spree.

China's regulators plan to move between 2 trillion ($309 billion) and 3 trillion yuan of local government debt, to reduce the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy.

"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.

China's top banks provided many of the loans to local government vehicles as part of the massive economic stimulus program launched by Beijing in late 2008 to counter the global financial crisis.

ICBC Ltd, China Construction Bank Corp, Bank of China Ltd and Agricultural Bank of China Ltd are the country's largest banks, and four of the 10 biggest banks in the world by market capitalization. Werner gives top ratings to ICBC and CCB, recommending them as "outperform".

"As part of the transfer, it is assumed that potential losses on this debt will be shared by the central government, the banks and the local governments themselves," Werner wrote. Government assumption of the debt would take the bulk of the burden off the banks' books.

With a market cap of $257 billion, ICBC is the largest bank in the world - more than $80 billion larger by that measure than JP Morgan.

On Wednesday, the Hong Kong-listed shares of China's big four banks were moving largely in sync with the broader market.

China's local governments are forbidden from borrowing directly from banks, so many set up special financing vehicles - a practice the country's banking regulator has said must be kept in check.

The scheme would be the second time China has stepped in to reshape its banking system since the late 1990s.

Then, the authorities transferred the banks' bad debts to asset management companies in preparation for their eventual listings.