Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON
News: Latest News
Latest NewsCompaniesMarketsEconomy & ForexCommoditiesInterest RatesBusiness LeadersFinance Pro.CalendarSectors 
All NewsEconomyCurrencies & ForexEconomic EventsCryptocurrenciesCybersecurityPress Releases

Spooked by defaults, China banks begin retreat from risk

03/25/2014 | 09:52pm EDT
A company logo of Chaori Solar is seen at the 12th China Photovoltaic Conference and International Photovoltaic Exhibition in Beijing

BEIJING (Reuters) - Some of China's struggling firms are finally getting the reception that regulators have been hoping for -- a cold shoulder from banks in the form of smaller and costlier loans.

Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China's economic transformation, has become a reality.

Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.

There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.

"Interest rates are going up 10 percent for the entire industry," said Wang Lei, a finance department manager at PKU HealthCare Corp <000788.SZ>. "Obtaining loans is getting difficult and expensive."

PKU HealthCare, which is controlled by Peking University and makes bulk pharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.

To be sure, several companies with strong balance sheets and profits reported no significant changes in their funding conditions.

That in itself is a welcome sign that banks are finally differentiating between the strong and the weak, more aware that they are on the hook for losses if businesses fail.

China's first-ever domestic bond default earlier this month when solar equipment maker Chaori Solar (>> Shanghai Chaori Solar Energy Science) missed its payment and regulators refused to step in, drove that message home.

"It was a wake-up call for lenders," said Christopher Lee, managing director and the head of greater China corporate ratings at Standard & Poor's. "There is no such thing as a risk-free investment."

That marks a painful, but necessary shift for the world's second biggest economy to fulfill Beijing's ambition to cut wasteful investment and secure more balanced long-term growth.

For household goods maker Elec-Tech International Co Ltd (>> Elec-Tech International Co., Ltd.), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech's securities department.

"Last year, the bank gave us a discount on our interest rates. This year, we probably won't get any discount," Zhang who declined to give his full name said. "It feels like banks are not lending and their checks are becoming more rigorous."

"STRATOSPHERIC DEBT LEVELS"

Some gauges of China's corporate debt are already flashing red.

Non-financial firms' debt jumped to 134 percent of China's GDP in 2012 from 103 percent in 2007, according to Standard & Poor's.

It predicted China's corporate debt will reach "stratospheric levels" and become the world's largest, overtaking the United States this year or next.

Fearing a wave of defaults as China's economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement.

Experts say banks were at first slow to respond, but in the past few months, banks have started turning down credit taps.

"We have become more prudent in issuing loans," said a spokesman for Bank of Ningbo.

He added that the bank has intensified communication with companies in troubled sectors or borrowers deep in debt.

"Under normal circumstances, we would review company loans every quarter or every six months, but for the sensitive cases, we will step up channel checks and work closely with the companies."

Another manager at a regional Chinese bank said it was overhauling its lending in cities identified as high-risk, such as Urdos and Wenzhou.

Located in Inner Mongolia, Urdos is infamous for its clusters of empty apartment blocks that pessimists say is an emblem of China's housing bubble. Wenzhou, is China's entrepreneurial hotbed that recently lost its shine after local property boom went bust.

THE BANK'S PROBLEM

Companies spurned by banks find a way around it. At a cost.

A listed supplier of building materials in southwestern China that declined to be identified said banks blacklisted it after two years of losses.

The firm, which is undergoing restructuring, borrowed 10 million yuan in the underground market at an annual rate of about 15 percent this year.

And as companies bend the rules, risks shift outside the banking system into the universe of networks of seemingly unrelated firms connected by murky financial deals.

For example, trade loans subsidized by the government to help selected sectors are quietly re-directed by companies to other unrelated businesses, firms say. New financing methods also emerge as easy credit dries up.

The latest plan hatched by a cash-strapped aluminum end-user involves having banks buy the metal and re-selling it to firms who pay out monthly loan plus interest.

Others such as Xiamen C&D Inc (>> Xiamen C&D Inc.), an import and export firm, are directly cashing in on firms' thirst for funds.

Xiamen C&D, which borrows at less than 6 percent per year is offering loans of several hundred thousand yuan to smaller firms at 7-8 percent, said Lin Mao, the secretary of Xiamen's board of directors.

For larger companies, typical loans amount to 20-30 million yuan, and are 90 percent insured by Chinese insurers, he said.

Banks grow more aware of the risks. But rather than pull the plug on teetering firms, some bankers say they prefer a slow exit to keep them afloat for as long as possible to claw back their loans.

"Few banks are able to retreat completely even if they should," said a banker at another regional Chinese bank who declined to be named. ($1 = 6.1888 Chinese Yuan)

(Additional reporting by Polly Yam in Hong Kong and Beijing newsroom; Writing by Koh Gui Qing; Editing by Tomasz Janowski)

By Fayen Wong and Matthew Miller


© Reuters 2014
Stocks mentioned in the article
ChangeLast1st jan.
ELEC-TECH INTERNATIONAL CO., LTD. 1.83% 1.67 End-of-day quote.34.68%
FIRST SOLAR, INC. 1.34% 74.62 Delayed Quote.-24.57%
GCL SYSTEM INTEGRATION TECHNOLOGY CO., LTD. -0.93% 3.18 End-of-day quote.-25.18%
SHIFT, INC. -1.64% 15560 End-of-day quote.8.74%
US DOLLAR / CHINESE YUAN RENMINBI (USD/CNY) 0.00% 6.431 Delayed Quote.-1.00%
XIAMEN C&D INC. 0.12% 8.06 End-of-day quote.-1.83%
Latest news "Economy & Forex"
02:42aAttack by an unmanned aerial surveillance system targets iraq's ain al-asad air base that hosts u.s. forces , no injuries - u.s. coalition
RE
01:42aCEGOS  : For the 7th time in a row, the Cegos Group is in the Top 20 list of Training Industry in the Training Outsourcing category
PU
12:51aColonial Pipeline halts all pipeline operations after cybersecurity attack
RE
12:42aULTRA MODERN POOL AND PATIO  : Pineapple Boat Shrimp Stir Fry
PU
12:27aColonial Pipeline halts all pipeline operations after cybersecurity attack
RE
12:15aWhat Happens to Stocks and Cryptocurrencies When -2-
DJ
12:15aWhat Happens to Stocks and Cryptocurrencies When the Fed Stops Raining Money?
DJ
12:08aIndia posts record daily rise in COVID-19 deaths as case numbers surge
RE
12:03aFROM MICRO TO MACRO : Using Micro Data to Understand Macroeconomics and Public Policy
PU
05/07RESERVE BANK OF INDIA  : Directions under Section 35A read with Section 56 of the Banking Regulation Act, 1949 – Millath Co-operative Bank Limited, Davangere, Karnataka – Extension of period
PU
Latest news "Economy & Forex"