Cut in Risk Weighting of Local Government Bonds Could Unleash 3 Trillion Yuan in Loans

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Beijing’s plans to slash the risk weighting of local government bonds in order to enhance their appeal to Chinese banks could potentially unleash 3 trillion yuan in loans according to domestic analysts.

Reports have recently emerged that China’s central government plan to cut the risk weighting of local government debt from to 0% from 20%, putting them on a par with the country’s sovereign bonds, in a bid to spur purchases by banks.

Domestic analysts say the move is likely to a have major impact upon both local government finances as well as the lending capabilities of Chinese banks.

Zhang Yiqun (张依群), head of the Jilin Province Financial Sciences Research Institute (吉林省财政科学研究所) said to Securities Dally that a reduction in the risk weighting of local government debt is equivalent to a reduction in risk controls for local governments.

This sends the signal that fiscal policy is set to become more active and local governments will be allowed to continue to expand their debt levels, despite a prior emphasis on curbing regional debt as part of Beijing’s heavy-handed deleveraging campaign.

The Ministry of Finance recently issued a directive calling for an acceleration in the issuance of local government special bonds, which Zhang said signals efforts to markedly stimulate  economic growth, expand investment and drive consumption.

Zhou Guannan (周冠南), an analyst with Huachuang Securities, said that if the local government debt risk weighting is cut to zero, this will free up a significant amount of bank capital for lending and investment, and will help to loosen up credit policy transmission.

Given that banks hold around 80 – 90% of local government debt, Zhou says the move could unleash 2.6 to 3 trillion yuan in risk-weighted assets for a corresponding volume of new loans.

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