China orders banks to cut investment in local government bonds

Another move to curb massive local borrowings.

The China Banking Regulatory Commission has capped at end-2012 levels loans by banks to local government financing vehicles or LGFVs.

Banks are banned from providing guarantees to the entities’ bonds. It told banks to be cautious when investing in bonds issued by LGFVs as policy makers seek to control local borrowing. Total local government debt may have risen 13% over two years to US$1.98 trillion as of December 2012.

Banks had advanced US$1.58 trillion of loans to LGFVs as of June 30, said CBRC. A US$653 billion (RMB4 trillion) stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they roll over or refinance with note sales.