China mulls helping local governments with US$1 trillion of bills
The government is considering asking state lenders and policy banks to lend to local authorities so they can make the payments in arrears
[BEIJING] China is preparing to tackle the significant backlog of unpaid bills owed by local governments to the private sector, according to people familiar with the matter, an amount of arrears some have estimated at over US$1 trillion.
The government is considering asking state lenders and policy banks including China Development Bank to lend to local authorities so they can make the payments in arrears, the people said, asking not to be named because the matter is private.
The amount of money under discussion would plug at least one trillion yuan (S$180.3 billion) of debt owed to private companies in the first phase of a longer-term initiative, one of the people said. Officials aim to complete the task by 2027, according to the people.
President Xi Jinping warned in a February speech made public last month that the government’s delayed payments to companies risks undermining people’s trust in the authorities. Underscoring the importance Beijing is placing on the issue, China’s top leader said unpaid bills could “cripple” affected businesses in the embattled private sector and was hurting “society at large.”
While the proposed assistance would offer relief to private-sector contractors, it would shift more risk onto state banks that already face rising loan losses.
The National Development and Reform Commission, the National Financial Regulatory Administration, and China Development Bank did not respond to requests for comment.
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Local government-related entities in China are estimated to owe 10 trillion yuan, or about US$1.4 trillion, to corporates and civil servants – equivalent to 7 per cent of the country’s gross domestic product last year, according to economist David Li Daokui’s estimate.
Caitong Securities said in a report last week that China may allocate about 200 billion yuan in special bonds this year to settle overdue payments to companies, based on projections for land-reserve and project-construction special bonds.
In recent months, authorities have instructed the nation’s major banks to provide support for the initiative, including asking them to give short-term liquidity loans to regional governments to settle overdue bills tied to their affiliated entities, people familiar said. While such debts are typically not owed by the local governments, they are responsible for repayment because they are backing the entities in debt.
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The policy may need further backing from regulators, as bankers are concerned about potential risks and need some form of assurance they won’t be held responsible if the advances turn bad, one of the people said.
Chinese banks are struggling with their profitability after being enlisted over the past few years to help prop up the economy with cheap loans, driving their margins to a record low.
At the same time, their balance sheets are under pressure from a growing pile of bad loans. In the first half of this year, the five biggest commercial banks set aside allowances for losses on loans of 3.51 trillion yuan, up almost 6 per cent from the end of last year. BLOOMBERG
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