Railway ministry's massive debts a grave danger for Chinese banks

Of the Ministry of Railways’ liabilities, some US$321 billion are bank loans.

Its total liabilities stood at US$428 billion in September 2012. Worried Chinese banking officials said China's financial stability might be compromised if the railway ministry's huge liabilities, especially those issued by banks, are not well managed.

The ministry is China's biggest issuer of corporate notes. It sold bonds worth a total of US$26.4 billion in 2012 to support development of the country's rail network.

Yi Gang, deputy governor of the People’s Bank of China, the central bank, said authorities must handle existing railway loans and bonds properly since the the railway ministry will be divided into two organizations.

The administrative portion will be called the State Railway Administration and placed under the Ministry of Transportation. The railway ministry's commercial operations portion will be spun off as a new company called China Railway Corporation.

"The railway construction loans involve many banks at the national and local levels. During the reform process, the government must make clear who is responsible for the debt."

"Although the institutions will change, China's railway construction is still rapidly developing. Therefore, the government must assuage the concerns of financial institutions, market players, credit rating agencies and the public by addressing the financing issues," Yi said.

Rampant lending by banks to finance construction of railway, highway, and other infrastructure after 2008 has been regarded by banking regulators as a major source of systemic risk.