'Creative' firms add to China's debt worries
CHINESE companies are getting more creative in the business of money lending as they struggle to keep profits up 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 over-capacity 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.
China's central bank increased pressure on banks to rein in such informal lending in money markets last week, letting short-term interest rates spike to extraordinary levels.
In the 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$329 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 Shandong, speaking on condition of anonymity. "We will lose more if we produce more," he said, noting that the firm loses an average 100-200 yuan per tonne of steel sold.
China's economic growth is expected widely 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 slowdown.
Beijing worries that 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 Standard and Poor's has estimated that outstanding shadow-banking credit totalled US$3.7 trillion (S$4.7 trillion) at the end of last year, equal to 44 per cent of GDP.
"This is a very, very big problem for the economy," said Mr Wei Yao, China economist at Societe Generale in Hong Kong.
"The existence of all these arbitrage efforts shows that in the real economy, there are few opportunities. You've limited all the opportunities for real growth, then you open a window in the financial markets; of course everyone goes there!"