Big Banks Cut Back on Financing of Public Private Partnerships

Multiple Chinese banks are dialling back their support for public-private partnerships, as regulators crack down on use of the vehicles by local government to engage in covert debt expansion.

The recent National Financial Work Conference which concluded on 28 December 2017 flagged greater scrutiny by Chinese regulators of local government debt risk, calling for “strict prohibitions on covert debt raising via government investment funds, public-private partnerships and government service procurements.”

The Ministry of Finance is now following through on the message, with one senior official telling Securities Times that use of covert debt raising has led to “rapid increase in debt volume and debt ratios exceeding the warning threshold, creating latent trigger points for risk.”

According to the official the Ministry of Finance will push for greater regulation and standardisation of PPP’s in 2018 in order to firmly control covert debt growth.

The ministry will exercise firm control of the financial “sluice gate” for new project financing, as well as “spur financial institutions to engage in due diligence and strictly control the pass…financial institutions are prohibited from providing financing to projects that lack stable operating cash flows to serve as a source of repayment, or lack lawful and compliant collateral.”

The ministry also wants to “firmly strike against the delusion on the part of financial institutions that the government will bail them out, and the delusion on the part of local government that the central government will back them up.”

Chinese banks have made haste to respond to Beijing’s signalling with one executive from the Agricultural Bank of China telling Securities Times that it has temporarily suspend PPP financing operations in response to the 2017 National Financial Work Conference.

According to the executive China’s big banks all received directives from the Ministry of Finance just after the conference mandating further standardisation of government financing activities, prompting many lenders to tighten their PPP activities.

The executive said that in addition to suspended new PPP business, it was also conducting a review of the legality and compliance of existing projects, and halting loans for those in breach of regulations.

Several of China’s other leading banks, including the Bank of Communications, the Industrial and Commercial Bank of China and Industrial Bank, have also all indicated that are cutting on PPP financing.

The Ministry of Finance began preparations for tighter regulation of China’s PPP sector last November when it called for local authorities to promptly rectify the problem of “widespread abuse” of PPP’s, as well as better manage information databases of local PPP’s

According to official data as of the end of October 2017 a total of 6806 PPP’s had entered the development phase in China, with a proposed total investment amount of 10.2 trillion yuan (USD$1.57 trillion).

The projects cover all 31 of China’s province-level administrative divisions, and a total of 19 sectors including transportation and environmental protection.

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