ZOMBIE HUNTERS
Chinese banks fear state deadbeats
There’s a list that Ni Baixiang, head of the Jiangxi branch of Industrial & Commercial Bank of China, would love to get his hands on.
Commonly referred to as the “zombie list”, it’s compiled by Jiangxi regional authorities and holds the names of the most deadbeat of borrowers: state-owned companies deemed too weak to survive and destined to be wound down. In short, the kind of enterprises that banks already weighed down by rising bad loans want to steer well clear of.
The trouble is, neither Ni nor his fellow bankers in Jiangxi are allowed to know who they are.
“They won’t tell us because if we know, we’ll lose confidence,” Ni said at a banking industry briefing in Beijing earlier this month.
Ni’s dilemma underscores the challenge China faces as it tries to stem a tide of bad loans while carrying out an orderly restructuring of a state corporate sector burdened by overcapacity and bloated bureaucracies. Several provincial governments are withholding information on zombie borrowers from banks for fear that they’ll cut off financing immediately, according to officials who asked not to be identified.
In several provinces, government-compiled lists of zombie companies are also kept secret from local banking regulators, the sources said. The local branch of the National Development & Reform Commission declined to comment.
Knowing which state-owned companies get the “zombie” designation can be crucial for bankers because it is the authorities who ultimately decide whether they will fail, and local officials often meddle in banks’ lending decisions.
An economy growing at the slowest pace in a quarter century is adding urgency to President Xi Jinping’s push to steer China away from the investment-led model that it has relied on in the past. A key part of that is restructuring industries saddled with overcapacity, such as steel, cement and coal. McKinsey & Co estimates that shedding surplus industrial capacity could add US$5.6 trillion to the economy between now and 2030.
At the same time, the shift has made some provinces reliant on those sectors vulnerable to slowing growth and joblessness. Jiangxi, for example, plans to shut down 205 coal mines and suspend approving any new coal projects over the next three years. The region’s bad-loan ratio is above the nationwide average and banks there are becoming reluctant to lend.
A key question is how the overhaul of state-owned enterprises (SOEs) will affect banks already reeling from the highest bad-loan levels since 2005. Many banks’ financial health is intimately tied to that of SOEs because they’ve spent decades lending predominantly to such entities.
“Local governments and banks have very different interests,” said Harrison Hu, the Singapore-based chief greater China economist at Royal Bank of Scotland Group Plc. “There’s no clear solution to satisfy both. The opaqueness creates significant risks for the whole system.”
Plans to reform state-owned companies could lead to an additional 1.2 trillion yuan ($181 billion) worth of loans turning sour, China International Capital Corp estimated in March. For creditors, including banks and bondholders, the prospect of defaults makes it important to gauge the level of support such firms may get from the government.
Keeping the identities of zombie companies from banks could compromise Xi’s economic reform blueprint because capital won’t be allocated efficiently, said He Xuanlai, a Singapore-based analyst at Commerzbank.
Some regional governments are more open to sharing information. In eastern Zhejiang province, the local bureau of the China Banking Regulatory Commission said in March that it was working with authorities to compile a zombie list and formulate plans for those companies to “exit” the market. The regulator said mergers and restructurings would be preferred over bankruptcies.
Not all provincial-level governments compile lists of zombie companies, the sources said.
On a national level, officials are debating how to deal with ailing SOEs. Ma Jun, chief economist of the central bank, wrote this month that China’s corporate debt was high by international standards and the government should reduce leverage by cleaning up zombie companies and carrying out debt-to-equity swaps.
The National Development & Reform Commission cautioned in June that deleveraging must be gradual to limit risks. The body, which supervises everything from national and regional economic planning to infrastructure investment, said zombie companies should be allowed to go bankrupt while enterprises that have good prospects, but face short-term difficulties to refinance debts, should get government support.
Jiangxi province, where the non-performing loan ratio among banks reached 2.5% last year — 0.83 points above the national average — is facing a “severe situation” as lenders grow reluctant to extend credit, the CBRC said.
The local banking regulator, which has been unable to get information about deadbeat borrowers from Jiangxi authorities, has compiled its own list, according to a person with knowledge of the matter.
In addition, banks there have worked with the CBRC to set up creditor committees to make sure good companies get support and those in difficulty are “kept stable”, while “zombies” are let go in an orderly way, the regulator’s local branch said at a briefing in Beijing. The committees cover 365 enterprises that together have almost 250 billion yuan in outstanding loans.
That mechanism has been a key to avoiding a panicked withdrawal of credit, according to Ni.
“We are often finding ourselves in a situation where someone screams all of a sudden and all banks, including ICBC, run for the door,” he said. “And the company kicks the bucket.”
“Local governments and banks have very different interests. There’s no clear solution to satisfy both. The opaqueness creates significant risks for the whole system” HARRISON HU Royal Bank of Scotland