Caixin
Feb 24, 2012 04:13 PM

Local Governments Hope to Dodge Debt Deadlines

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Default fears have driven central and local government officials into critical negotiations with banks over proposed payback adjustments for trillions of yuan in outstanding debt.

The negotiators are focusing on an estimated 1.8 trillion yuan in loans to local government financing platforms scheduled to mature in 2012.

They're also keeping an eye on the rest of what may be more than 10 trillion yuan in outstanding debt issued to local governments for infrastructure construction and other big-ticket projects in recent years.

According to the most recent figures from the National Audit Office, local government financing platforms owed 10.7 trillion yuan at the end of 2010. Of that amount, loans worth about 2.6 trillion yuan came due last year, although it's unclear how much – if any – of that was repaid.

Banks are being asked to rejigger repayment schedules and let borrowers settle maturing debt with fresh loans under a risk-mitigation plan drafted by the central government, Caixin has learned. Details have yet to be released.

Loan adjustments would help local governments buy time while they wait for a fresh gust of economic growth to pump up fiscal revenues.

Without adjustments, repaying near-term loans may prove impossible for local governments whose revenue sources have been drying up. A slowing real estate market last year bit into government land sales, for example, and tax receipts have slid in parts of the country hit by slowing exports.

An official at one branch of a state-owned bank told Caixin that since early last year banking regulators have been expecting at least some financing platforms to default on loans.

So far, no major defaults have been reported. Negotiators promoting debt repayment adjustments say bankers can prevent defaults now by working with local government borrowers.

In addition, they say, bankers willing to restructure loans can help provinces, cities and other communities complete infrastructure projects launched with borrowed money as part of China's stimulus response to the 2008 global financial crisis.

Borrowing Blocks

The China Banking Regulatory Commission set the stage for debt adjustments late last year when it ordered financing platforms and their banks to carefully review debt contracts tied to building projects.

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