While China's ballooning local government debt has many investors steering clear of financial stocks, one equity analyst maintains that all banks are not made equal, and it's the smaller policy lenders, or banks tasked to finance economic and trade development projects, which are the weak links.
"Policy banks like China Development Bank absorb a good portion, about 25-30 percent of these local government financing loans onto their books, while big banks tend to have better quality local government loans," Senior Equity Analyst of Sanford C. Bernstein Mike Werner told CNBC.
These policy banks tend to have poor credit quality, Werner says, as they are generally sought by the local government for funding as a last resort after being denied credit by big state-owned banks.
"Anytime this happens, risk management and credit quality tend to deteriorate, and smaller commercial banks (and policy banks) have to sweep up all the loans," he noted.
Chinese government officials have repeatedly warned of the large systemic risk posed by loans made to local governments since 2008, when the country embarked on a stimulus spending spree to ward off the global financial crisis.Page 1 of 2 | Next Page