![]() In March, a banker at a mid-tier commercial bank in northern China told China Business News his bank had begun a two-pronged strategy of “controlling growth, reducing existing” credit towards coal and steel dependent regions, including Shanxi.Īnd earlier this month, state-owned Shaanxi Coal and Chemical Industry Group Co Ltd became the latest coal firm to delay a planned bond issue, citing “highly volatile” market conditions. It urged financial institutions to support the “rational” financing needs of coal and steel firms but “resolutely compress and withdraw” loans for long-term money-losing firms that had “lost market competitiveness.” “For the whole of April, the government’s actions and messages on zombie SOEs were very in line and clear cut,” said the Singapore-based fund manager.Īn April 20 central bank statement appears to have helped crystallize bond market scepticism. Reflecting the changing attitude, corporate debt sold off sharply in April and credit spreads rose to their widest levels since 2012 as investors priced-in different risk for different debtors. An unprecedented number of over 20 bond defaults have been confirmed as many companies, especially in industries with surplus production, feel the pinch of China’s weakest economic growth in 25 years.Ĭhina’s policymakers have issued a series of tough comments on “zombie” SOEs, many of which are heavily indebted from years of breakneck expansion. That year, China also began to cautiously allow bond issuers to default, although many were subsequently bailed out. ![]() Worried about the pace of growth, the government initiated a broad crackdown on shadow banking in 2014. Between 20, outstanding shadow bank credit jumped more than 50 percent to over 30 trillion yuan ($4.58 trillion), ratings agency Moody’s said. Shadow banking rose to prominence in the boom years after the global financial crisis when Beijing encouraged a debt binge to help the economy bounce back from the downturn. Net shadow bank lending in Hebei, Shanxi, Jilin, Anhui, Henan, Sichuan and Shandong rose 240 percent to 249 billion yuan in the first quarter, against a 30 percent rise nationwide. So of course certain regions are more exposed and we look at that,” said a Singapore-based fund manager who invests in Chinese debt.Ĭentral bank figures show that wealthier regions largely found credit easy to come by in the first quarter - when commercial bank lending rose to a record high.Īmong better-off regions, only Shanghai experienced a substantial increase in the share of non-bank lending as a proportion of overall loans in the first quarter.īut firms in legacy industrial regions like Liaoning found themselves increasingly reliant on shadow bank finance. “It’s no longer a case of who owns the thing, but in which industry they’re in. To an extent, that now appears to be happening. For that to happen, lenders need to price in real credit risk. The change is in line with official efforts to shrink the country’s industrial overcapacity, but could shift growing risks in the corporate bond market back onto the shoulders of retail investors buying wealth management products backed by shadow banking loans.Įconomists have long argued the government needs to ensure credit is delivered to more productive parts of the economy if it wants to sustain growth. The sharp retreat of weaker regions into shadow lending - when credit as a whole has expanded massively - suggests that traditional creditors are rapidly abandoning the long-held belief that lending to state-owned enterprises (SOEs) is risk free because local governments nearly always bail them out.Īn increasing number of bond defaulters over the past half year have been state-owned firms, many in legacy industrial sectors. “Smaller and poorer areas are different.” “Economically advanced regions, especially those with strong access to municipal bond funding, don’t really have to fall back on shadow financing as much,” said a director at a Shanghai-based asset management firm. ![]() The borrowing accounted for 19 percent of the province’s total financing, up from just 1 percent in the first quarter of 2015. Firms in Liaoning, an industrial powerhouse in China’s northeast, borrowed over 2,000 percent more from shadow banks in the first quarter of this year, compared with a year earlier. ![]()
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