China’s campaign to slim down its bloated industries could be derailed by more than $US1.5 trillion ($A1.96 trillion) of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks.
Tackling industrial overcapacity has become a priority for Beijing to make its slowing economy more efficient and address a supply glut that has hammered coal and steel prices.
China is giving more than 100 billion yuan ($A20.2 billion) in the following two years to handle cutbacks from coal and steel, yet that might be made accessible once obligations have been settled.
Critics say there is no clear mechanism for handling the obligation trouble, which will put tremendous strain on the weakest areas of the managing an account division. The debt figures, revealed in papers submitted to China’s parliament in March, highlight the dilemma facing state firms grappling with surplus capacity and how difficult it will be to pull off this central plank of Beijing’s economic reform plans.
Costs for the estimated 1.3 million coal-sector layoffs alone are as much as 195 billion yuan, and coal industry delegates attending parliament urged government to provide more support to deal with the mounting debts of hundreds of stricken “zombie” firms.
The four sectors targeted in the battle against overcapacity owe around 10.2 trillion yuan, according to documents submitted to parliament by Wang Mingsheng, head of Anhui-based coal firm Huaibei Mining.
The four areas focused in the fight against overcapacity owe around 10.2 trillion yuan, as per archives submitted to parliament by Wang Mingsheng, head of Anhui-based coal firm Huaibei Mining.
China’s measurements department puts coal and steel obligations alone at eight trillion yuan, of which around a third is bank obligationBankers say city and regional banks set up by party or provincial government officials are most exposed, and that official NPLs, which already doubled in 2015, underestimate the scale of their problem lending.
“China needs to set up a new organisation, a special bank just to take over these debts in order to avoid the local banks going bankrupt,”
said steel industry consultant Xu Zhongbo.
China’s banking regulator didn’t respond a request for comment, though in early March sent notices to joint-stock banks and city commercial lenders to boost risk assessment and collateral valuations to control exposure to industries suffering overcapacity.
A lawyer who handles steel industry non-performing loans for mid-sized Chinese banks said:
“Banks’ fear is not without reason. The steel sector’s continued slump increases the difficulty of disposing of outstanding non-performing loans.”
As well as seeking cuts in value-added tax and relief from expensive “social functions” like healthcare and education, the coal delegates urged government to provide additional funding and policy support, and establish “debt-to-equity” mechanisms to handle the problem.Liang Tieshan, chairman of the Henan Pingdingshan Coal Group, said:
“Because the mechanisms and related policies for state-owned firms exiting the market are not complete, closing them will raise thorny problems like the settlement of debts,”
Normal obligation to-resource proportions at steel firms rose 1.55 rate focuses to 70.1 for every penny in 2015 and for no less than five firms surpass 100 for every penny, figures from the China Iron and Steel Association (CISA) appear. Coal officials assess their part normal surpasses 75 for every penny. In plans published in February, Beijing promised to slash 100-150 million tonnes, or up to 12.5 per cent, of crude steel capacity and as much as 500 million tonnes, or nine per cent, of coal production in over three to five years.
Liang of Pingdingshan Coal said state banks responded by implementing tougher credit policies and recalling some loans.
He said one mine in Henan was facing a 40 billion yuan repayment bill that was unlikely to be rolled over.
The February, policy documents said China would create a special mechanism to restructure industry debts and non-performing assets while introducing incentives to write off bad debts or transfer them to specialist asset managers, but officials said more specific measures were required.
“To cut capacity we cannot just shout slogans and issue targets – we must have a realistic and effective mechanism,”
said Wang at Huaibei Mining Group.
He said it was unreasonable to expect local governments to take the initiative in closing zombie coal firms, given the contribution coal makes to local gross domestic product, employment and government revenue.
China’s industry ministry and the commission responsible for state assets did not return requests for comment on how government will deal with the debt burden, or how it would affect their plans to cut capacity.
The action plans said China would rely mostly on “market methods” to solve debt problems, but Liang said the market was all but useless when it came to disposing of assets once a mine had closed.
Zhang Wuzong, chairman of Shiheng Special Steel Group, said there was also no incentive for managers to use China’s bankruptcy laws, which offer little protection for executives.
“Creditors will come to retrieve their debts, and not just the banks,” he said. “Your personal assets are frozen, and you will be sued. It is terrifying, so why don’t these bosses simply run away?”
Chinese bankers complain privately they are also being held personally responsible for recovering doubtful debts, with loan officers’ passports taken away to keep them from fleeing.
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