(Yicai Global) July 5 -- China’s large state-owned banks are not extending 25-year loans to eligible local government financing vehicles, which are funding mechanisms such as the sale of bonds, the 21st Century Business Herald reported today, citing banking insiders, in response to an earlier media report.

Banks only approve corporate loans after taking into account a number of factors such as the nature of the project, the applicant’s creditworthiness and the level of risk, the report said.

In recent months, large state-owned banks such as Industrial and Commercial Bank of China and China Construction Bank have started to extend loans to local government financing vehicles that mature in 25 years, Bloomberg News reported on July 4, citing people familiar with the matter. Most corporate loans in China mature in 10 years.

“Some came with waivers on any interest or principal payments in the first four years, though the interest will be accrued for later,” the New York-based financial news agency added.

The speculation follows a wave of defaults by Chinese local government financial vehicles since last year.

Better management of local government financial vehicles is necessary to reduce debt risks, Minister of Finance Liu Kun said in January. The central government will end the expectation by local governments that their debts will eventually be borne by the central government. A clear boundary between government and business needs to be drawn, and clear responsibilities and controllable risks must be defined in order to drive sustained fiscal development, he added.

Editor: Kim Taylor