OREANDA-NEWS. August 01, 2011. Q: Someone estimated that the local government financing platform loans were as much as 14 trillion yuan. Is this estimation reliable? And how do you think about the risk of such loans?

A: Both the method and conclusion of this estimation, which figured the local government financing platform loans at 14 trillion yuan, are incorrect.

After the publication of the 2010 China Regional Financial Performance Report, based on the sentence that the share of local government financing platform loans in local RMB loan outstanding is generally below 30 percent, some journalists simply used the 30 percent share to multiply the national aggregate of RMB loans outstanding-47 trillion yuan at the end of last year-to arrive at the conclusion that local government financing platform loans were about 14 trillion yuan. This calculation method and its result are wrong. The share of local government financing platform loans in the total RMB loans outstanding varies across provinces.

The proportion in some provinces is far below 30 percent, and even the highest proportion is no more than 30 percent. Therefore, it is not proper to use 30 percent as the percentage for the whole country. In addition, the total amount of the local RMB loans outstanding is not equal to the national RMB loans, for the former excludes loans outstanding directly issued by the head office of national commercial banks, that is to say, the total amount of local RMB loans outstanding is less than the aggregate RMB loans outstanding which is 47 trillion at end 2010. Thus, it is not appropriate to view the aggregate RMB loans outstanding as the aggregation of local RMB loans outstanding. Moreover, at the requirement of the State Council, local governments have started to regulate and streamline their financing platform loans, and underwriting of such loans have been tightened. Hence, it is certainly inaccurate to estimate the current total amount of local government financing platform loans based on the statistics collected at the end of 2010.

Responding to this incorrect estimation, an official from the PBC has made a clarification at a People’s Daily exclusive interview on June 3rd, and he explicitly pointed out, “the calculation method of 14 trillion yuan has obviously overestimated the loan. The risk of local government financing platform loans are controllable.” This interview has been widely reported by the press. However, some institutions still use the erroneous data and evaluate related matters on such a basis, against the principle of preciseness that professional institutions should observe.

With regard to the risk of the local government financing platform loans, we consider it is generally controllable.

The fund of local government financing platform is mainly injected into projects with potential economic and social benefits. In recent years, with the rapid industrialization and urbanization, many projects funded by local government financing platform loans are able to generate stable and sufficient cash flow, which can cover the debt principal and interest; some projects are able to combine the construction with the development of the surrounding or along-the-road areas, with consolidated income that can meet the need of debt repayment. These projects mentioned above generate enough income for debt service. Only a small number of projects are with cash flows insufficient to cover the debt principal and interest and need support from fiscal authorities.

We look at the information provided by listed banks, most of Chinese commercial banks are listed companies and disclose financial statements regularly after being audited by accounting firms. According to the data released in such statements, the non-performing loan ratio is pretty low. Commercial banks also pay much attention to strengthening control of quality and risk of their loans.

From a macro perspective, the use of local government financing platform loans has not only produced economic profits, but also social and environmental benefits. These projects have upgraded local infrastructure and effectively accelerated the pace of urbanization, which is helpful for industry cluster, service development and opportunities of investment and consumption. The projects also improve economic efficiency, promote local economic and social development and enhance the potential of economic development. Moreover, in recent years, fiscal revenue is growing rapidly and the total debt burden is not hefty. Generally, the risk of local government financing platform loans is manageable.