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Price to rent and price to income growth, two affordability ratios, have nearly doubled in Àrst tier cities... out. Deep declines in these markets would

raises over the summer, LGFV loan losses

precipitate a worst-case scenario, fi ltering

and

through to banks balance sheets and further

create capital shortages going forward. In

hampering local government budgets. This

the early part of the decade the Ministry of

could require a national bailout.

Finance segregated non-performing loans

Basel

III

capital

requirements

will

The CBRC estimates the total amount of

in a good bank/ bad bank model. It is likely

LGFV debt at RMB 7tn, while Northwestern

that the Chinese government will purchase

University’s

non-performing LGFV loans. This will not

Victor

Shih

estimates

the

amount stands at RMB 11tn. A CBRC source

precipitate

in China Securities News stated that at the

sovereign crisis since even after including

end of June 2010, 50% of LGFV loans are

upper estimates of LGFV loans and other

to projects that must borrow from other

implicitly government backed debt, total

sources to supplement revenue to make

debt to GDP stands at roughly 75%. The

interest

likely outcome will be painful for a handful of

payments

and

26%

are

highly

problematic loans that were either originated

a

European

periphery

style

banks, but the risk is not systemic.

fraudulently or misused. In addition there are

The 30.1% fi xed asset investment surge in

approximately RMB 2tn+ LGFV loans in off-

2009 illustrates China’s reliance on investment

balance sheet securitizations marketed as

spending to escape the brunt of the financial

short-term deposit alternatives. With 2010Q2

crisis. The rise of the Chinese consumer is

total banking sector assets of RMB 87.2tn

not only desirable for the Chinese economy,

and the average capital adequacy ratio of

but

11%, a 2.5tn+ increase in non-performing

demonstrates that driving GDP via fixed asset

loans would prove extremely damaging to

investment is no longer viable in China. China

bank capitalizations. The CBRC is forcing

must retool its economy to tap its latent

Chinese banks to recognize non-performing

domestic consumption demand to create

LGFV loans this year. Despite bank capital

more sustainable growth going forward. iBR

also

essential.

The

FA L L 2 0 1 0

111210 hq.indd 63

story

of

LGFVs

I N T E R N AT I O N A L B U S I N E S S R E V I E W

63

11/27/2010 3:13:23 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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