20. 1 billion yuan compared to non-performing loans the will indubitably face the pressure created by a suddenly prior quarter. The rise in non-performing loans bumped tightened capital chain the non-performing loan ratio slightly to 1.0 percent but it is still below the 1.1 percent ratio the previous year. In addition, a considerable number of platform loans are Doubtful and subordinated credits made up the vast in land mortgages and pledges. Therefore, the majority majority of non-performing loans. Among various types of repayments rely on land assessment revenues, which of commercial banks, the non-performing loan ratios for are depressed and not expected to rebound anytim rural commercial banks and large commercial banks were soon. With less land assessment revenue coming in, the 1.6 percent and 1. 1 percent, respectively, and were both debt repayment ability of such financing platforms will higher than the average level. 3 At the same time, the decrease, and it is probable that the asset quality of the rating agency Moody's evaluated the bank loans in local credits will deteriorate government debts, and predicted that 8 to 12 percent of total loans may become non-performing loans. 4 The minimization of risk in local financing platform loans is a long-term process that is dependent on further There are two main reasons that loans default from local progress being made to government financing platforms. First, local government Promote the reformation of the national and lo revenues and expenditures do not match. In 2010 debt management system Allocate debt among various levels of government 48.9 percent of nationwide fiscal revenue, but assume based on financial capacity, duties and responsibilities: 82.2 percent of nationwide fiscal expenditures. The Improve local finance and taxation systems ocal financial deficit climbed as high as 3, 327. 1 billion Control the actions of local governments in incurring yuan, and national funds accounted for 82 percent of debt and undertaking guarantees ocal fiscal revenue. Because local government financing Monitor and control debts associated with local latform loans generally involve large amounts and long governments terms, and certain difficulties exist in supervising their Clean up and standardize financing platform use, close attention needs to be paid to the risks for companies, credit default Establish open, clear and complete government Second, as disclosed in the PBOC report, 70 percent Design a direct financing mechanism with market of the more than 10,000 financing platforms were restrictions on such basis. 5 scattered among county-level governments, which have the tightest financial resources among all levels In 2012, we expect to see banks supporting management of government. Under relatively high liquidity restraints efforts by local financing platforms to minimize risks. For at present, Tier-1 credit loans put into the county level example, loans for completed projects (including railways, by banks will be greatly tightened, the space for the highways and infrastructure) should immediately enter borrowing money to pay debt operating model the period for principal repayment to accurately reflect practiced by the financing platforms of county-level exposure. Prior to approval, efforts should be taken to governments with tight financial resources will become scrutinize any new construction projects and minimize increasingly restricted, and by that time, such platforms the occurrence of non-performing loans Operation Report (2011). China Banking Regulatory oody,s, "Gradually Debt burd Poses Challenge to Chinese Banks", July 12, 2011 14,2011,http://news.hexun com2011-12.14136311609 2012 China Banking Industry Top Ten Trends and Outlook--Enhancing Capital Management, Meeting New Challenges2012 China Banking Industry Top Ten Trends and Outlook—Enhancing Capital Management, Meeting New Challenges 3 20.1 billion yuan compared to non-performing loans the prior quarter. The rise in non-performing loans bumped up the non-performing loan ratio slightly to 1.0 percent, but it is still below the 1.1 percent ratio the previous year. Doubtful and subordinated credits made up the vast majority of non-performing loans. Among various types of commercial banks, the non-performing loan ratios for rural commercial banks and large commercial banks were 1.6 percent and 1.1 percent, respectively, and were both higher than the average level.3 At the same time, the rating agency Moody’s evaluated the bank loans in local government debts, and predicted that 8 to 12 percent of total loans may become non-performing loans.4 There are two main reasons that loans default from local government financing platforms. First, local government revenues and expenditures do not match. In 2010, fiscal revenues of local governments accounted for 48.9 percent of nationwide fiscal revenue, but assumed 82.2 percent of nationwide fiscal expenditures. The local financial deficit climbed as high as 3,327.1 billion yuan, and national funds accounted for 82 percent of local fiscal revenue. Because local government financing platform loans generally involve large amounts and long terms, and certain difficulties exist in supervising their use, close attention needs to be paid to the risks for credit default. Second, as disclosed in the PBOC report, 70 percent of the more than 10,000 financing platforms were scattered among county-level governments, which have the tightest financial resources among all levels of government. Under relatively high liquidity restraints at present, Tier-1 credit loans put into the county level by banks will be greatly tightened, the space for the “borrowing money to pay debt” operating model practiced by the financing platforms of county-level governments with tight financial resources will become increasingly restricted, and by that time, such platforms will indubitably face the pressure created by a suddenly tightened capital chain. In addition, a considerable number of platform loans are in land mortgages and pledges. Therefore, the majority of repayments rely on land assessment revenues, which are depressed and not expected to rebound anytime soon. With less land assessment revenue coming in, the debt repayment ability of such financing platforms will decrease, and it is probable that the asset quality of the credits will deteriorate. The minimization of risk in local financing platform loans is a long-term process that is dependent on further progress being made to: • Promote the reformation of the national and local debt management system; • Allocate debt among various levels of government based on financial capacity, duties and responsibilities; • Improve local finance and taxation systems; • Control the actions of local governments in incurring debt and undertaking guarantees; • Monitor and control debts associated with local governments; • Clean up and standardize financing platform companies; • Establish open, clear and complete government balance sheets; and, • Design a direct financing mechanism with market restrictions on such basis.5 In 2012, we expect to see banks supporting management efforts by local financing platforms to minimize risks. For example, loans for completed projects (including railways, highways and infrastructure) should immediately enter the period for principal repayment to accurately reflect exposure. Prior to approval, efforts should be taken to scrutinize any new construction projects and minimize the occurrence of non-performing loans. 3 China Banking Industry Operation Report (2011), China Banking Regulatory Commission. 4 Moody’s, “Gradually Intensified Local Government Debt Burden Poses Challenge to Chinese Banks”, July 12, 2011. 5 hexun.com, “Basic Financing Mode of Local Governments”, December 14, 2011, http://news.hexun. com/2011-12-14/136311609. html