China may allow banks to securitise loans made to local governments under a pilot programme to help ward off potential risks in the banking sector, the 21st Century Herald reported on Friday, citing banking sources. China Development Bank, the largest creditor of local government debt, and some other commercial banks would take the lead in a trail project, the newspaper said. But it did not give a specific timetable on the final launch of the products.
"China's banking sector could face relatively big systemic risks. It is very important to strengthen asset liquidity management, and asset-backed securitisation is no doubt a very good tool," the newspaper said, citing a unnamed source. Beijing's economic stimulus package launched in late 2008 to counter the impact of the global financial crisis sparked unfettered bank lending to local governments, resulting in piles of debt - officially estimated at 10.7 trillion yuan - that analysts fear could destabilise the economy.
The report also said the underlying assets of such products would be also expanded to include loans to small-to medium-sized enterprises and agricultural-related projects to boost financing support for the weakest part of the economy. The newspaper report comes as Chinese bankers and analysts called for securitising part of bank loans to stimulate growth in the banking and financial sectors. The central bank said this week it would push forward asset securitisation in 2012 and encourage the development of "safe, simple and appropriate" financial derivatives.
China launched a securitisation programme in 2005, backed by high-quality bank assets, such as loans to state companies and mortgage loans. The government slowed down the process of financial innovation in the wake of the US subprime mortgage crisis, but there are sign that it's picking up again.
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