How will CBRC's new guideline on LGFV loans change the banking landscape in China?

Find out why BBVA says the impact may not be as large.

We recently reported that though not yet published on its website, CBRC has already issued the “Guideline of Strengthening the Risk Monitoring on LGFV Loans in 2013” to the banks that not only reiterates the total exposure control on LGFV loans.

Here's what Alicia Garcia Herrero, Chief Economist for Emerging Markets at BBVA has to say:

The measures that the CBRC have announced to rein in the exposure to LGFVs can be summarized as follows: i) requiring banks to report their aggregate exposure to LGFVs; ii) forbidding banks from providing guarantees for LGFV bond issuance;

iii) limiting banks’ purchases of LGFV bonds; and iv) instructing banks to keep the level of LGFV loans below the 2011 level, and the share of LGFV loans to total loans below its 2012 level.

The latter looks particularly difficult to implement since it affects the stock of loans having already been granted since end 2011. In any event, a lot of the financing to LGFVs during 2012 has happened through the shadow banking so the impact may not be as large.

It would have been a much stricter measure if banks had been asked to dismantle the accumulated guarantees for LGFV bond issuance, which is what they have been doing the most, or they had been asked to dismantle the sale of local government bonds to the banks’ clients through wealth management products (WMPs).

If the measures announced cannot stop the growing exposure (direct or indirect) of banks to LGFVs, these measures may come soon since systemic risk is growing and financial stability is at stake.