China Orders Banks to Kick the Can Down the Road on Loans

When China took on its economic stimulus plan a few years ago, the central government simply ordered the country’s banks to make loans to local and regional governments for the purpose getting the local economies going. The total tab was about $1.7 trillion, and over the next three years, half the money is supposed to be repaid.

There’s no way that can happen, so China’s central government has now ordered the banks to extend the loan repayment deadline by as much as four years, according to a report in the Financial Times.

One Chinese official told the FT:

From a longer-term perspective, the investment projects launched during the financial crisis will have no problem generating a return. It is just that many have not yet been completed. They would be under a lot of pressure if debts had to be covered immediately.

China’s local governments have the benefit of an implicit guarantee backed by the central government. It would be a miracle if the locals ever pay this money back. It would also be a miracle if the country’s banks take a writedown for the loss.

The central government has always made up these shortfalls before, and there’s no reason to believe they won’t this time. It’s not a question of “if,” only “when.”