China Construction Bank (CCB) dismissed concerns about rising bad debts on Monday and said its relationship with Bank of America remains strong despite talk its US partner and shareholder may sell part of its stake. The reassurances on bad debts from the world's No 2 bank by market value follow widespread investors' worries that asset quality could severely deteriorate should the Chinese economy slow.
Loans to local government financing vehicles (LGFV), which have been singled out as a potential hotspot for souring lending, now make up about 10 percent of CCB's total advances at about 580 billion yuan, said the bank's Chairman Guo Shuqing. Such loans had a non-performing loan ratio of about 1.1 percent, roughly in line with the 1.03 percent seen for all loans and advances, Guo told a news conferenceon Monday after reporting a strong 31 percent rise in its first-half net profit.
Some 93 percent of all the bank's loans to local government were backed by cash flows or provisions, the bank said, meaning there is an underlying revenue generator or assets such as land to back up the loan. China's local provincial or city governments are banned from borrowing directly from banks, so many of them set up financing vehicles that take loans to pay for infrastructure projects. These companies have chalked up an estimated 10.7 trillion yuan ($1.6 trillion) worth of loans as of end-2010, according to China's state auditor.
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