Bloomberg ︳2016-07-08
China Provinces Meddle in Bank Loan Choices to Keep Firms Alive
Bloomberg News
‘Now local governments are interfering,’ China Merchants says
Shandong calls for committees to prevent banks cutting lines
China’s regional governments are meddling in decisions of state-owned lenders to prop up local steel makers and miners, in a setback to efforts to let the market decide who gets financing.
Last week, the Shandong government took steps to protect companies that have outstanding loans of 500 million yuan ($74.8 million) or more by asking banks to form committees to block any lender that tries to cut funding lines to the firms. The Shanxi government urged banks last month not to withdraw lending to the seven coal firms owned by the northern province.
While Premier Li Keqiang has pledged to weed out zombie companies, the nation is considering providing about 10 of its state-owned enterprises with an aid package, people familiar with the matter said. Local governments have at times also stepped in. Xining Special Steel Co. said in a filing in May the Qinghai government pledged to offer financing support for its note payments if necessary. Local lenders are usually involved in government-engineered bailouts even though they are grappling with a growing mountain of bad debt.
China Provincial Risk Heatmap.
Source: Bloomberg Intelligence
“It is against the principle of supply-side reforms of the central government, which is working to deleverage bloated state enterprises, cut excess capacity and let zombie companies die,” said Wei Hou, Hong Kong-based analyst at Sanford C. Bernstein.
State-owned enterprises have more debt and worse repayment ability than private-owned firms, although they can borrow longer term because of government support, according to a May analysis of China’s 3,000 biggest listed companies by Natixis SA. Private companies have cut debt to 53 percent of assets from 58 percent in 2007, while SOEs have seen those figures jump to 62 percent from 55 percent, according to Shi Kang, an associate economics professor at the Chinese University of Hong Kong.
“The recent local government measures to encourage more lending to regional enterprises show the governments have hit their limit in preventing corporate failures,” said Sun Binbin, an analyst at China Merchants Securities Co. "Now local governments are interfering with financial institutions."
Fading Confidence
Investors are losing confidence in debt-laden companies owned by regional governments. Dongbei Special Steel Group Co., mainly controlled by the Liaoning government, missed multiple debt payments this year.
Among Chinese companies that have bond maturities of over 10 billion yuan by the year end, the seven with the highest non-payment risk in the coming year are all owned by local provinces, according to the Bloomberg Default Risk model. Shandong Iron & Steel Group Co. ranks worst with a 7.9 percent probability the provincial government-owned firm will miss payments. The model tracks metrics including share performance, liabilities and cash flow. It doesn’t make assumptions about shareholder support, regulations or future earnings as a debt rating would.
Shandong Iron & Steel faces 20 billion yuan of bond maturities before the year end, the most among all companies owned by China’s local governments, according to Bloomberg-compiled data. The firm didn’t respond to a fax seeking comment. Two calls to the State-owned Asset Supervision and Administration Commission of Shandong Provincial Government went unanswered.
Balancing Act
Default worries have made it harder for riskier companies to refinance. Seventeen publicly traded bonds in China have defaulted this year, compared with six in 2015, data compiled by Bloomberg show. The premium of five-year AA- medium-term debt over top-rated corporate notes has climbed to the highest level in four years at 277 basis points.
“Local governments have the willingness to help out regional enterprises to avoid systemic risk,” said Li Ning, general manager of the fixed-income department in Beijing at Western Securities Co. “But if there is too big of a debt hole at some of those companies, the provinces wouldn’t have the ability to help.”
— With assistance by Yuling Yang, and Lianting Tu