Chinese Bank Sues Government For Past Due Loan

Prior articles have mentioned some local governments have a small amount of overdue debt, but this is being mentioned as the possible first default of a local government funding vehicle, entities created by local governments to borrow from banks for investment projects.

Chinese bank sues local govt financing vehicle in rare public spat

A Chinese bank is suing a local government financing vehicle over a bad loan in a rare public display of a deepening rift between lenders and borrowers in China's murky $3 trillion local debt market.

The unusual step also highlights growing strains in the market confronted by slowing economic growth and a property sector that has started to cool off after decades of runaway expansion.

Qilu Bank, based in the city of Jinan in the coastal province of Shandong, announced in its 2013 annual report -- published online in Chinese and English -- that it was suing a local government financing vehicle (LGFV) over unpaid debt.

The bank said the Urban Construction and Comprehensive Development Company of Licheng District failed to make payments on a 35.4 million yuan ($5.71 million) outstanding loan, along with 6.1 million yuan in unpaid interest.

"To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan," wrote Nomura analysts in a research note distributed to clients on Monday.

......Until recently banks have been willing to roll over LGFVs' debts indefinitely, avoiding write-downs and keeping reported non-performing loan (NPL) ratios at levels well below what analysts considered realistic -- a strategy analysts say worked fine so long as China maintained double-digit economic growth.

Chinese banking sources agreed that while de-facto defaults by LGFVs are common, the public nature of the disclosure was unusual given the fraternal relationship between the two entities. Both are headquartered in Jinan, and according to the Qilu report the Licheng District LGFV is one of its shareholders, holding 0.08 percent of its shares.

"LGFV defaults are to be expected and are inevitable," said a loan officer at a Shanghai-based Chinese bank, who spoke on condition of anonymity, but said in most cases the defaults were hidden from public view using accounting methods.

However, pressured by regulators to clean up their books, banks have grown less willing to roll over the loans and more sceptical about local governments' readiness to bail out failed their financing arms.

A senior bond trader at a major Chinese state-owned bank in Shanghai noted that while investors still largely considered debt issued by provincial-level financing vehicles to be effectively guaranteed, that no longer held true for lower level entities.

Some loans are backed by land sales as well and those sales aren't going so well lately.

From the annual report, page 13 of this PDF: 齐鲁银行股份有限公司 2013 年年报摘要

Jinan City Urban Construction and Development Company, the number of shares 1,896,654 shares, 0.08% stake. At the end of 2013, the corporate loan balance was ￥35.07 million yuan, the overdue interest owed is 6,133,247.27 yuan, loan classified as doubtful, has litigation.