2010-07-30 15:07

China will exclude 27 percent of bank loans to local government projects from a forthcoming clean-up of financing vehicles run by local officials, two banking sources told Reuters on Friday.

About 23 percent of the 7.66 trillion yuan ($1.13 trillion) in loans that banks have extended to these vehicles are at risk of default, but 27 percent are generating enough cash flow to pay off the loans, according to data leaked from a meeting of bankers and regulators.

Ring-fencing these 2 trillion yuan of sound loans would ease some of the pressure on banks and ensure that the projects they are financing would not be affected by the planned clampdown on local government borrowing, the two sources said.

Several government agencies are working out how to implement an order issued by the State Council, China's cabinet, to strengthen the management of local government debt vehicles.

Investors have been jittery in case strict curbs force the cancellation of projects, leading to a surge in bad loans. A China Banking Regulatory Commission official has said not all the loans identified by banks as risky would turn sour.