Bank lending to local government financing vehicles curbed

China urges local governments to abide by the rules to avert more bad loans.

The China Banking Regulatory Commission, the financial regulator, said any new loans to local government financing vehicles must be covered by existing cash flows while the projects for which the funds are intended must generate returns.

It also prohibits "irregular" lending to these vehicles. Banks ar required to strictly follow lending regulations.

Chinese banks had a total of US$1.4 trillion in outstanding loans to local government financing vehicles at the end of last year.

Many local governments are forbidden from borrowing money directly and have set up special financial vehicles to get around these restrictions. These vehicles provide funding for expensive infrastructure and real-estate projects that often take years to generate any returns

Analysts said the tougher rules on new lending to local government financing vehicles reflect renewed concerns about potential debt troubles and financial instability.

Most Chinese local governments are forbidden from borrowing money directly. Some have set up special financial vehicles to help get around such restrictions and provide funding for costly infrastructure and real-estate projects that often take years to generate any returns.