7 key things you need to know about CBRC's new guideline on LGFV loans

It not only reiterates the total exposure control on LGFV loans.

Barclays reveals that according to local news (21cbh, Mar 13, 2013), the CBRC has issued the “Guideline of Strengthening the Risk Monitoring on LGFV Loans in 2013” to the banks, while it has not yet been published on the CBRC’s website.

Here's more from Barclays:

According to the report, on March 7, 2013, Mr. Shang Fulin, chairman of the CBRC said that LGFV loans in China have grown 2% over the past two years to current RMB 9.3tn and the government would continue to control the overall volume and dissolve the underlying risks, in the next step.

In fact, CBRC has imposed “zero-growth” policy on LGFV loans in 2012 and will continue this policy in 2013.

We also highlighted in our recent report, there is an increasing risk of regulatory tightening on LGFV financing and shadow banking.

More comprehensive and details
According to the report, the new guideline not only reiterates the total exposure control on LGFV loans – total outstanding amount of LGFV should not be higher than the amount at end-2011, but also specifies: 1) total loan exposure to have zero-growth policy in 2013, same as 2012; 2) conditions to grant new LGFV loans;

3) LGFV projects and industries to be supported; 4) exposure limit by different levels of province and prefecture; 5) exposure limit to high leverage LGFVs; 6) investment on LGFV bonds to be approved by bank’s headquarter; and 7) ban on providing guarantee to LGFV bonds (Figure 1).

In addition to monitoring LGFV loans only, the report also says that the guideline asks the banks to monitor and control total LGFV exposures through corporate bonds, medium-term notes, trust products and WMPs. It is the first time that the CBRC requires the banks to manage both bank and non-bank LGFV exposures.

Rising exposure to LGFV through non-bank financing
Due to strict control on LGFV loans in recent years, LGFVs have moved to seek non-bank financing and bypass regulatory scrutiny. According to Wind’s data, at end-2012, LGFV bonds increased 53% y/y to RMB 2.7tn.

According to trust association, since 1Q12, government-trust cooperation products have increased more rapidly than overall trust products. At end-2012, total government trust cooperation products reached RMB 512bn, up 98% y/y.

In January and February of 2013, the non-bank total social financing (TSF) grew rapidly which could also indicate the risk on non-bank financing has been increasing.

In fact, regulators in China have started to control the increasing LGFV risk on non-bank financing. On December 31, 2012, the Ministry of Finance (MOF), the People’s Bank of China (PBOC), the National Development and Reform Commission (NDRC) and the China Banking Regulatory Commission (CBRC) jointly issued a circular to further regulate the local governments’ fund-raising methods for building infrastructure and other projects, which regulates the funding activities of LGFVs. In our view, the CBRC’s new guideline on LGFV loans and bonds will further curb the funding provided to the LGFVs with weak financial position and repayment ability.

To implement or not and how tight are the keys; government to balance growth vs. risks
In our view, the government needs to balance the trade-off between tighter risk control on LGFV vs. lower economic growth. The recent wave of regulatory tightening seems to suggest risk management is again back on the agenda.

While the guidelines have been issued, the implementation of it could lead to different results. Being the first year in office, the new government may not want to a significant slowdown in economic growth, hence, we believe the implementation could be mild to the extent that it can still achieve 7.5%-plus GDP growth.

Thus, control on LGFV financing could have a moderately negative impact on LGFV’s access to funding, especially those lower-level LGFVs who find it more difficult to borrow. But the impact should be manageable as most LGFV loans and bonds have strong credit quality. According to Wind’s data, at end-Feb 2013, 99% of the LGFV bonds had AA- or above credit ratings.