Saturday, April 26, 2014

Shit, Please Meet Fan: Steel NPLs Worth > 2% of China's GDP

Banks' Bad Loans Rise on Troubles in Steel Industry -

Agricultural Bank of China, Bank of Communications and others see non-performing loans rise as steel traders struggle to make repayments

(Beijing) – The ailing steel trading industry has taken a toll on many banks, including the Agricultural Bank of China, whose recently released annual report shows its bad loans rose almost 2 billion yuan last year.

The bank's executives said problems with non-performing loans started in June and were focused on the Yangtze River Delta, especially in the steel production and trading industries. The delta area comprises Shanghai, southern Jiangsu Province and northern Zhejiang Province.

The Bank of Communications, which reported 7.3 billion yuan worth of bad loans last year, said its loan quality deteriorated in part because steel traders struggled to repay money.

Several sources from different banks also singled out loans to steel producers and trading companies that have turned sour as a reason their bad loans rose last year.

A source at China Citic Bank said nearly 10 percent of its loans to companies in the sector are overdue, but the total amount of bad loans owed by steel companies was not large.

Citic Bank increased its quota of bad loans that can be written off last year from 2 billion to 5.2 billion yuan, before announcing its annual report. It shows that non-performing loans increased by 7.7 billion yuan in 2013, up nearly 63 percent from 2012.

Zhu Xiaohuang, the bank's president, said the increase was primarily due to bad loans extended to steel trading companies between 2011 and 2013.

Business has been tough for many private steel producers and trading companies since mid-2012 as the economy slowed. Some failed because they squandered money in stock investments and by trading properties. Many used steel products as financing tools and even lied to banks to get loans. They ran into trouble as the price of steel fell.

But even big state-owned companies are struggling. China Iron and Steel Association, a trade association, said many of country's major steel-producing and trading companies' debt-to-asset ratios have passed the 70 percent red line.

Liu Zhenjiang, the association's vice chairman, said the first quarter of this year was shaping up to be "the worst one since the industry entered the new century."

There is no consensus about how many loans owed by steel companies are at risk of loss. A source close to the banking regulator said it was 1.5 trillion yuan at the end of last year. The large SOEs were especially heavily indebted, he said.

Banks lent to big SOEs not so much because they were financially healthier than private companies but because they think the government would bail them out in the event of a problem, a source from Citic Bank said.

In fact, many SOEs' debts exceeded their net assets, but they can still borrow from banks and make money by relending to private companies, an analyst familiar with the situation said.

This relending practice became common in the beginning of 2011, industry observers say. A typical scheme would see an SOE buy products for a private trading company, which returns the favor later by paying the SOE more than the products cost, a manager of a private steel trading company said. If the private company cannot make the payment, the SOE can dispose of the products.

Many centrally administered SOEs, including Sinosteel Corp. and China National Building Material Group Corp., have profited by lending to private companies under similar arrangements, sources with knowledge of the matter said.

This violates the rules of SOE management, they say, but enforcement of the rules has always been weak.

(Rewritten by Wang Yuqian)

(via Instapaper)

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