Ballooning local government debt threatens Big Four

Loans by China's Big Four banks to local government financing vehicles (LGFVs) amounting to US$410 billion from January to June has increased the risk of default by these entities.

Their total loans this first half was 24% larger than the US$331.2 million for the same period in 2011. Analysts fear that the massive mountain of debt amassed by these LGFVs will lead to a default by many of these cash starved local governments.

The People's Bank of China, the central bank, estimated outstanding LGFV loans at US$1.25 trillion last March.

Industry experts warned that China faces immense pressure to clear-up these debts and said that the risks cannot be overlooked. Despite China's decelerating economy, banks are compelled to extend additional lending to LGFCs to boost national growth and avoid key projects being abandoned..

The Big Four consists of the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Agricultural Bank of China (ABC or AgBank).

Except for ICBC, the three other banks increased their exposure to LGFVs during the first half. ICBC saw its LGFV loans drop by US$363 million during the first semester.

On the other hand, ABC’s loans to LGFVs stood at US$65 billion at the end of June compared with US$63 billion for all of 2011.

BOC's LGFV loans rose to US$67 billion from US$65 billion while CCB's increased to US$69.9 billion from US$68 billion.