Mount­ing debts could de­rail China’s growth agenda

The Pak Banker - - FRONT PAGE -

China's cam­paign to slim down its bloated in­dus­tries could be de­railed by more than $1.5 tril­lion of debt in its steel, coal, ce­ment and non­fer­rous metal sec­tors, which threat­ens to over­whelm lo­cal banks. Tack­ling in­dus­trial over­ca­pac­ity has be­come a pri­or­ity for Bei­jing to make its slow­ing econ­omy more ef­fi­cient and ad­dress a sup­ply glut that has ham­mered coal and steel prices.

China is pro­vid­ing more than 100 bil­lion yuan ($15 bil­lion) in the next two years to han­dle lay­offs from coal and steel, but that will only be made avail­able once debts have been set­tled. Crit­ics say there is no clear mech­a­nism for tack­ling the debt bur­den, which will put huge strain on the weak­est sec­tions of the bank­ing sec­tor. The debt fig­ures, re­vealed in pa­pers sub­mit­ted to China's par­lia­ment this month, high­light the dilemma fac­ing state firms grap­pling with sur­plus ca­pac­ity and how dif­fi­cult it will be to pull off this cen­tral plank of Bei­jing's eco­nomic re­form plans.

Costs for the es­ti­mated 1.3 mil­lion coal-sec­tor lay­offs alone are as much as 195 bil­lion yuan, and coal in­dus­try del­e­gates at­tend­ing par­lia­ment urged govern­ment to pro­vide more sup­port to deal with the mount­ing debts of hun­dreds of stricken "zom­bie" firms.

The four sec­tors tar­geted in the bat­tle against over­ca­pac­ity owe around 10.2 tril­lion yuan ($1.56 tril­lion), ac­cord­ing to doc­u­ments sub­mit­ted to par­lia­ment by Wang Ming­sheng, head of An­hui-based coal firm Huaibei Min­ing.

China's sta­tis­tics bureau puts coal and steel debts alone at 8 tril­lion yuan, of which about a third is bank debt. If 20 per­cent of that were to go bad in 2016, which in­dus­try an­a­lysts say is not un­re­al­is­tic, it would raise Chi­nese banks' non-per­form­ing loans by nearly half.

Bankers say city and re­gional banks set up by party or pro­vin­cial govern­ment of­fi­cials are most ex­posed, and that of­fi­cial NPLs, which al­ready dou­bled last year, un­der­es­ti­mate the scale of their prob­lem lend­ing.

"China needs to set up a new or­ga­ni­za­tion, a spe­cial bank just to take over th­ese debts in or­der to avoid the lo­cal banks go­ing bank­rupt," said steel in­dus­try con­sul­tant Xu Zhongbo.

China's bank­ing reg­u­la­tor didn't re­turn a re­quest for com­ment, though ear­lier in March sent no­tices to joint-stock banks and city com­mer­cial lenders to boost risk as­sess­ment and col­lat­eral val­u­a­tions to con­trol ex­po­sure to in­dus­tries suf­fer­ing over­ca­pac­ity.

A lawyer who han­dles steel in­dus­try non-per­form­ing loans for mid-sized Chi­nese banks said: "Banks' fear is not with­out rea­son. The steel sec­tor's con­tin­ued slump in­creases the dif­fi­culty of dis­pos­ing of out­stand­ing non-per­form­ing loans."

As well as seek­ing cuts in value-added tax and re­lief from ex­pen­sive "so­cial func­tions" like health­care and education, the coal del­e­gates urged govern­ment to pro­vide ad­di­tional fund­ing and pol­icy sup­port, and es­tab­lish "debt-to-equity" mech­a­nisms to han­dle the prob­lem.

"Be­cause the mech­a­nisms and re­lated poli­cies for state-owned firms ex­it­ing the mar­ket are not com­plete, clos­ing them will raise thorny prob­lems like the set­tle­ment of debts," said Liang Tieshan, chair­man of the He­nan Pingding­shan Coal Group. Av­er­age debt-to-equity ra­tios at steel firms rose 1.55 per­cent­age points to 70.1 per­cent in 2015 and for at least five firms ex­ceed 100 per­cent, fig­ures from the China Iron and Steel As­so­ci­a­tion (CISA) show. Coal ex­ec­u­tives es­ti­mate their sec­tor av­er­age ex­ceeds 75 per­cent.

In plans pub­lished in Fe­bru­ary, Bei­jing promised to slash 100-150 mil­lion tonnes, or up to 12.5 per­cent, of crude steel ca­pac­ity and as much as 500 mil­lion tonnes, or 9 per­cent, of coal pro­duc­tion in over three to five years.

Liang of Pingding­shan Coal said state banks re­sponded by im­ple­ment­ing tougher credit poli­cies and re­call­ing some loans. He said one mine in He­nan was fac­ing a 40 bil­lion yuan re­pay­ment bill that was un­likely to be rolled over. The Fe­bru­ary pol­icy doc­u­ments said China would cre­ate a spe­cial mech­a­nism to re­struc­ture in­dus­try debts and non-per­form­ing as­sets while in­tro­duc­ing in­cen­tives to write off bad debts or trans­fer them to spe­cial­ist as­set man­agers, but of­fi­cials said more spe­cific mea­sures were re­quired.

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