China firms stir crisis as they push into lending
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Firms borrow to lend to others at higher interest, adding to debt risks
Reuters
24 June 2013
Chinese companies are getting more creative in the business of money lending as they struggle to keep profits flowing in a cooling economy, raising concerns that they are adding to the mountain of debt risks building in the world's No. 2 economy.
Big state companies in industries struggling with overcapacity but with easy access to credit are borrowing funds - not to invest in their business but to lend to smaller firms, sometimes at several times the official interest rate, part of an informal lending market in China the authorities are now targeting.
China's central bank raised pressure on banks to rein in such practices last week, letting short- term interest rates spike to extraordinary levels.
In the US$3.7 trillion (S$4.7 trillion) "shadow banking" market, the fastest growing area is in so-called entrusted loans, which are arranged by banks on the companies' behalf, and in bankers' acceptance notes, tradeable securities that give a steady flow of cash. Issuance of entrusted loans and bankers' acceptance notes has more than doubled to 1.6 trillion yuan (S$333 billion) in the first four months of this year from 636 billion yuan a year ago.
"Can we use the money to expand production? Definitely not," said a deputy general manager at a state-owned steel firm in the eastern Shandong province last week, speaking on condition of anonymity.
"We will lose more if we produce more. We can only rely on other channels," he added, noting that the firm loses an average 100 yuan to 200 yuan per tonne of steel sold.
China's growth is widely expected to slow further in the current quarter, making lending money an increasingly attractive business option.
But there are concerns that some of the money is going into areas the government would rather it did not, for example real estate speculation, raising the risk of it turning bad while not helping the economy out of its current slowdown. Indeed, debt is shaping up to be China's biggest financial problem.
Beijing worries the shadow banking market is creating asset- price bubbles, and the central bank has tried to put a barrier in the way of it in recent weeks by declining to inject major funds into money markets.
Ratings agency S&P has estimated that outstanding shadow banking credit totalled US$3.7 trillion by the end of last year, equal to 44 per cent of gross domestic product.
Fitch has put it at about 60 per cent, saying "torrid growth" has made the total of all forms of credit, including regular lending, shadow and hidden underground lending, as much as 200 per cent of GDP.
"This is a very, very big problem for the economy," said Societe Generale's China economist Wei Yao.
With entrusted loans, a company provides the funds but, to circumvent a ban on direct lending to other firms, it designates a commercial bank to lend the money to a specific borrower. The lender stipulates the amount, tenor and rate of the loan, while the banks earn fees from both sides without the loans showing up on their balance sheets.
The average monthly amount of new entrusted loans was 179 billion yuan in the first four months of the year, up from an average of 106 billion yuan a month last year.
The steel company manager said he borrows from banks at around the 6 per cent official rate, then issues an entrusted loan to a borrower at up to twice that rate.
Some private companies are also cashing in.
Zhejiang Longsheng Group, a speciality chemicals maker based near Shanghai, detailed 50 entrusted loans worth 3 billion yuan outstanding in its 2012 annual report. The company lent to subsidiaries at rates of 6 per cent to 7 per cent, but unrelated companies were charged as much as 25 per cent.