China's banks might face risks if finance arms set up by local governments to invest in real estate and infrastructure projects cannot repay heavy borrowing, a deputy central bank governor said Monday.
Regulators have told banks to examine outstanding loans to such financing vehicles, said Su Ning at a news conference. He declined to give details of their debt levels but said such entities accounted for a "very high proportion" of bank lending last year.
"This could have potential risks, because some vehicles have fiscal backing from local governments but many local governments have problems with their fiscal balances. Some vehicles have no profits," Su said.
Premier Wen Jiabao warned Friday that China's banks and public finance system face growing risks after a record surge in lending last year, when state-owned banks were told to step up credit to support Beijing's stimulus.
Chinese media say the financing arms of local governments have borrowed some 6 trillion yuan ($880 billion). An American researcher, Victor Shih of Northwestern University, estimates total local government borrowing in 2004-09 at 12 trillion ($1.6 trillion).
China's banking industry, flush with cash from its economic boom, is regarded as the world's strongest after lenders avoided mortgage-related credit turmoil that battered Western institutions. But regulators worry that too much lending last year went to unneeded factories, real estate and other investments, setting the stage for a rise in bad loans.
Bank lending was a key element of Beijing's 4 trillion yuan ($586 billion) stimulus that helped China rebound from the global economic crisis. Beijing provided only about 25 percent of the total and the plan called for the rest to be spent by local governments and state companies, financed by bank lending.
State media said last month that banks were ordered to curb lending to local government financing arms and to reject projects that do not fit Beijing's development plans.
Earlier Monday, the president of Bank of China Ltd., one of the country's top four state-owned commercial lenders, said it would "strictly control the total amount of lending" to local government finance vehicles.
"This year we will change the structure of lending," Li Lihui said at a news conference.
Li said lending will focus on industries that "fit the government's industrial policies" and "nurture new growth centers," including renewable energy, oil and gas, autos and healthcare.
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