Credit risk rules to tighten: CBRC

China will tighten regulation of credit default risks associated with local-government-linked corporations and shadow financing activities in 2013 to prevent systemic risks, China's banking regulator said Wednesday, indicating that the country's regulator has taken significant notice of the risks.

The China Banking Regulatory Commission (CBRC) made the announcement in a 2012 annual report Wednesday.

China's banking sector recorded a total of 1.07 trillion yuan ($172 billion) worth of non-performing loans (NPLs) by the end of 2012, an increase of 23.4 billion yuan from a year ago, the regulator's report said.

The country's local government financing vehicles (­LGFVs) face mounting pressure to repay loans as a total of 3.5 trillion yuan ($564.5 billion) worth of bank loans will be maturing over the next three years, equivalent to 37.5 percent of the total outstanding loans by the end of 2012, the China Business News reported Tuesday.

Recently agencies including Fitch Ratings and Moody's Investors Service have all expressed similar concerns about local government liabilities and fast-expanding credit fueled by opaque shadow banking activities.

Despite rising concerns about local government debt, "there won't be a large breakout of credit default associated with LGFVs due to regulatory tolerance," Liao Qiang, director of financial institutions ratings for Standard and Poor's, told the Global Times Wednesday.

The regulatory tolerance includes rollover of local government debt due, allowing LGFVs to issue bonds, and even some local financial arrangements such as asking State-owned companies to financially support the debt-laden government-linked corporations, Liao said.

A senior Chinese auditor has warned that local government debt is "out of control," the Financial Times reported on April 17 citing Zhang Ke, vice-chairman of China's accounting association, who said that his accounting firm ShineWing had stopped signing off on bond sales by local governments as a result of these concerns.

Bond sales by LGFVs accelerated in March to about 140 billion yuan, but slowed in April, which was partly attributed to tightening regulations by policymakers, Xu Gao, an analyst at Everbright Securities, wrote in a research report released Tuesday.

The CBRC recently asked commercial banks to control their lending to these government-linked bodies. Banks are not allowed to extend new credit to an LGFV if its cash flow is not enough to cover its debt or if it has a debt-to-asset ratio above 80 percent, according to the CBRC document.