Jun 21, 2013
New York, June 18th 2013 - Moody's Investors Service says that exposures to local government financing vehicles (LGFVs) represent a key risk for Chinese banks, reflecting the LGFVs' weak standalone credit profiles and the fact that they accounted for 14% of total bank loans at end-2012.
In addition, while the ultimate amount of bank losses will depend on the extent to which local governments are prepared to support their LGFVs, the sector's high dependence on external support poses a risk that is further reflected in Moody's own credit analysis and ratings of the Chinese banks themselves.
Moody's says that its assessment of the financial state of the LGFVs -- which are used by many of China's local governments to raise funding -- is based partly on its analysis of 388 city construction investment companies, a proxy for the LGFVs.
Moody's conclusions were contained in its just-released special comment "Loans to Local Government Financing Vehicles Pose Risks to Chinese Banks."
According to the report, in recent years, many of the city construction investment companies have seen their cash flows stagnate or decline, while their debt levels have risen.
In this context, on a standalone basis, only 53% of the surveyed companies -- according to Moody's -- now have sufficient cash resources to cover estimated debt and interest payments in 2013 without resorting to refinancing.
And while arguing that the extent of losses to the banks would, as indicated, depend on the degree to which local governments and regulators support the LGFVs, Moody's notes that several developments may challenge their ability to provide assistance in the future.
For example, slower revenue growth at some local governments will constrain their capacity to provide support while regulators are also limiting local governments' ability to inject land reserves into their LGFVs.
In addition, access to funding may be affected by regulatory restrictions on the use of shadow banking products to fund LGFV projects and by regulatory guidance limiting future bank lending to LGFVs.
To date, though, despite a few reports about payment problems, local government support has been forthcoming, says the Moody's special comment. As a result of such support, and not because of the LGFVs' intrinsic financial strength, banks' reported non-performing loans (NPLs) remain low, around or below 0.5% of their total LGFV loans.
Local government support to the LGFVs has come in the form of subsidies, capital injections and involvement in debt renegotiations.