Chinese leaders have in recent months signaled increasing concern over debt incurred by local governments to fund infrastructure and other development projects, and risks to the banking system if those loans cannot be repaid.
Estimates of the total debt incurred by local governments range from the CNY $878 billion, widely cited in the Chinese media, to the $1.6 trillion calculated by Northwestern University professor Victor Shih.
Those sums, of the same order of magnitude as all the official debt of China’s central government, have drawn high-level concern.
China Banking Regulatory Commission Chairman Liu Mingkang said, "By the end of this coming June, all of the banks are required to submit comprehensive reassessment reports to us about that area’s exposure. In cases where the principal plus interest due exceeds cash flow, modifications will be made to loans, including increased collateral."
Then in the third quarter of this year, the CBRC will send "on-spot inspection teams" to examine individual loan cases, accounting for 36.5% of the new credit dispersed last year. This is not all as tough as it sounds but it does show the government is going to take a much stricter policy on bank loans.
Wall Street Journal reports that by the end of the third quarter, in cases where problems are found with the loans, banks will be required to write down the value of their assets and call on provisions.