By John Galt
August 15, 2011 – 22:15 ET
Here we go again, with the official China Securities Journal reporting that ¥4.6 trillion or about $719 billion in local government debt due this year and next. This has been estimated by the authorities to be approximately 43% of total troublesome debt according to an article in Business China today. From the same article, RMB 4.6 tln of Chinese Local Government Debt Due in 2011-2012 (Click to read in full), it would appear that some aspects of their banking system may indeed get hit by this troubled debt:
The unnamed “authoritative” source was cited as saying that about one third of loans granted to 2,900 local government financing vehicles (LGFVs), or about RMB 2.8 trillion, will be booked as general corporate loans. Banks will then be able to provide fewer provisions for these loans, relieving pressure to raise fresh capital and easing fears that slower growth in the world’s No.2 economy could set off a wave of loan defaults and hobble its state-run banks.
The reclassified loans to LGFVs were those that were fully backed with cash flows from the projects they were used to fund, the paper said.
Late last year, the China Banking Regulatory Commission, the nation’s top banking watchdog, released a new rule requiring Chinese banks to allocate extra capital to prevent lending to LGFVs from causing more credit risks.
The new rule, which could erode 1 percentage point off of banks’ overall capital adequacy ratios, classifies loans to local governments into four types based on repayment ability: full coverage; basic coverage; half coverage; and no coverage, for which banks should provide a minimum provision coverage ratio of 100%, 140%, 250% and 300%, respectively.
The reclassification of some local government debts as loans to ordinary companies will relieve pressure on banks as they do not have to set aside as much cash to cover the risks — provision coverage for ordinary corporate loans is set at 100%.
Since it is unknown if the statements contained in the article are true, or even if the accounting is remotely honest, the world could see a sudden intersection of crisis coalescing around a condensed period of time with the U.S. budget appropriations crisis and super committee deadline, the Eurozone disaster, and now the possible implosion of both China and Hong Kong.
Considering that possibility, only one question remains: