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Forex Flash: Chinese regulator to tighten Local Gov financing vehicles - Nomura

Nomura economist Zhiwei Zhang notes that the China Banking Regulatory Commission (CBRC) is planning to tighten controls on lending to local government financing vehicles (LGFVs), reports the 21st Century Economic News today.

He adds that the papers reports that the CBRC has issued a preliminary draft entitled ´Guidance to strengthen risk management of lending to LFGVs in 2013´, for internal discussion. He writes, “Measures mentioned in the article include: regulators and banks shall set up systems to track LGFV debt comprehensively, including bank loans, different types of corporate bonds, and shadow banking instruments such as trust products and wealth management products; local bank branches need approval from headquarters to buy LGFV bonds; the level of bank loans to LGFVs in 2013 shall not rise above its 2011 level, and the share of LGFV loans in total loans cannot exceed its 2012 level.”

Zhang feels that the report is consistent with previous signals from the central government that it is concerned about financial risks and will take action to contain risks in 2013. However, he adds that it is not clear how effective this guidance will be at this stage. For now, he feels that it is simply a preliminary draft, while its effect critically depends on how strictly government issued guidance will implement it. Further, on December 31st 2012, the central government issued guidance to ban improper fundraising activities by LGFVs, but such activity has remained ongoing in the first two months of 2013, and social financing hit a record high in January and remained strong in February, on a working day basis.

He finishes by writing, “We believe policy will have to be tightened eventually, but the timing and pace of tightening remain uncertain. We continue to focus on the size of total social financing as the best
indicator of potential policy change regarding credit supply.”

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