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Top Chinese banker warns of lending risks

(Xinhua)
Updated: 2009-11-09 13:12

BEIJING: A top Chinese banker has warned domestic banks to control the pace of lending flowing to infrastructure projects backed by local governments, China Daily reported Monday.

Xiao Gang, head of the Bank of China, the country's third-largest lender, was quoted by the newspaper as saying some of the local government-led fund raising enterprises were borrowing beyond their repayment capacity, which could create "systemic risks" for the Chinese banks, but controls should not be realized by putting a sudden brake on such lending.

The enterprises are known as local government financing platforms that seek funding for projects like transportation, water and electricity supply and environmental protection, the newspaper said.

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The Bank of China chairman's remarks came as doubts were mounting about local governments' fiscal capacity to repay the massive funds they borrowed to finance various local infrastructure projects.

At present, local governments are not officially allowed to issue bonds to finance their public works building projects, making bank loans main source of capital for these projects.

Xiao said many such loans were usually funded by several banks together. If default happens, it will affect the nation's banking industry extensively.

A big chunk of the giant 8.37 trillion yuan (about 1.2 trillion U.S. dollars) in loans extended by the Chinese banks so far this year have been poured into infrastructure projects backed by local governments, according to the newspaper.

Xiao said it is critical to scrutinize where these loans end up to ensure they are not misused and evaluate the projects' future cash flow situation and safeguard banks' returns by finding multiple sources to guarantee loan repayment.