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 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 <002506.SZ> 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
<002005.SZ>, 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.
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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 <600153.SS>, 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)
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