Barclays figures raise fears over four banks' lending to provinces

A massive 15 to 20 per cent of the loans China's big four banks have made to local governments are likely to go bad, according to data from Barclays Capital.

Three of the big four - Agricultural Bank of China, ICBC and China Construction Bank - have sunk 15 per cent of the money they loaned to fund provincial authorities into infrastructure projects that are 'less than 30 per cent covered by cash flows', estimates in a note published by Barclays show. That means the projects have very little chance of funding their interest payments.

Meanwhile, a fifth of Bank of China's loans fall into this category, according to Barclays.

This latest evidence the big four banks are routinely allocating capital to unviable local authority schemes raises questions about whether these institutions have learned to lend commercially since they began selling shares to the public from 2005.

'Maybe three years ago there was a debate as to whether the Chinese banking system had liberalised and whether credit decisions were made according to risk and return,' said Mark Williams of consultancy Capital Economics. 'I think we've certainly taken a significant step back in that debate.'

In 2008, as exports plunged because of the global recession, Beijing ordered local authorities to spend big on infrastructure to boost GDP.