Essentially, the
king underwrote a massive industrial expansion without underwriting the
consumers inside the country. The only
way out is to do that now and to underwrite massive sales overseas were
plausible. Otherwise we have a monster
case of shuttered over capacity.
Now that is not
so bad in itself. It is just that vast
amounts of loans will simply not be repaid at all. The money is long spent and remains in
circulation been slowly taxed back to the government. The government needs new ways to stimulate
investment when the need is hardly apparent.
Otherwise we are
going to be treated to something known as quantitative easing as the central
bank bails out its banking system. Again
this huge credit pool must now be shifted to the consumers to supply something
they will buy like housing they can afford and to overseas investments in which
Chinese money supports capital investments there.
Credit-Driven
China Glut Threatens Surge Into Bank Crisis
By Bloomberg News November
19, 2013
In China’s “Shipping Valley,” where the
Yangtze River empties into the sea north of Shanghai, the once-bustling home of
the nation’s biggest private shipbuilder is deadly quiet on a recent morning.
Rows of dilapidated five-story dormitories in
the city of Nantong, previously housing China Rongsheng Heavy Industries Group
Holdings Ltd.’s 38,000 employees, were abandoned after the shipbuilder
teetering on collapse cut almost 80 percent of its workers over the past two
years. Most video arcades, restaurants and shops serving them have closed.
A $6.6 trillion credit binge during the past
five years, encouraged by Beijing policy makers as stimulus to combat a global
economic slowdown, now threatens to stoke a debt crisis. At stake are trillions
of yuan in bank loans that companies producing everything from ships to steel
to solar power are struggling to repay as the world’s second-largest economy
heads for the weakest annual expansion since 1999.
Rongsheng, which is seeking a government bailout
after accumulating 25 billion yuan ($4.1 billion) in unpaid loans as of June,
including to Bank of China Ltd., is a casualty of over-investment gone bust. In
Nantong, the only remaining market is selling past-its-shelf-life bread, woolly
shoe pads and other dusty items at a discount as shopkeeper Qiu Aibing prepares
to wind down before winter. There’s no sign of a single customer.
“After I’m done selling all this stuff, I’ll
be gone,” said Qiu, briefly lifting his eyes from a TV and casting a careless look
at the half-empty shelves. “The workers didn’t have money to spend anyway
because there’s no work to be done, and many of them haven’t been paid for
months.”
Bad
Loans
China’s biggest banks are already affected,
tripling the amount of bad loans they wrote off in the first half of this year
and cleaning up their books ahead of what may be a fresh wave of defaults.
Industrial & Commercial Bank of China Ltd. and its four largest competitors
expunged 22.1 billion yuan of debt that couldn’t be collected through June, up
from 7.65 billion yuan a year earlier, regulatory filings show.
“In the next three to four years, industries
with excess capacity will be the main source of credit loss for banks and their
nonperforming loans as China cleans up the legacy,” said Liao Qiang, a
Beijing-based director at Standard & Poor’s. “The speed of the process will
depend on the government’s determination and whether they are willing to incur
short-term pain for long-term gain.”
‘Very
Painful’
Premier Li Keqiang, who took office in March,
pledged to open the economy to market forces and strip power from the
government in a process he described as “very painful and even feels like
cutting one’s wrist.” In July, he vowed to curb overcapacity, which the
government blames for driving down prices, eroding profits and generating
pollution. Policy makers meeting in Beijing last week said they would elevate
the role of markets in the nation’s economy.
China’s economy probably will expand 7.6
percent in 2013, the weakest pace since 1999, even as growth rebounded in the
third quarter, according to the median estimate of economists surveyed by
Bloomberg News.
Shang Fulin, China’s top banking regulator,
this month urged lenders to “seek channels to clean up bad loans by industries
with overcapacity to prevent new risks from brewing” and refrain from dragging
their feet in dealing with the issue.
Credit
Deterioration
China’s credit quality started to deteriorate
in late 2011 as borrowers took on more debt to serve their obligations amid a
slowing economy and weaker income. Interest owed by borrowers rose to an
estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings
estimated in September. By the end of 2017, it may climb to as much as 22
percent and “ultimately overwhelm borrowers.”
Meanwhile, China’s total credit will be pushed
to almost 250 percent of gross domestic product by then, almost double the 130
percent of 2008, according to Fitch.
The nation might face credit losses of as much
as $3 trillion as defaults ensue from the expansion of the past four years,
particularly by non-bank lenders such as trusts, exceeding that seen prior to
other credit crises, Goldman Sachs Group Inc. estimated in August.
Rongsheng, whose assets jumped sevenfold
between 2007 and 2012 when government-directed lending led to a shipbuilding
boom, also has loans outstanding to Export-Import Bank of China and China
Development Bank Corp., state-owned policy banks set up to provide financial
support at a cheaper cost to companies and industries endorsed by the
government. Rongsheng may post a second consecutive loss of 2 billion yuan this
year and a 1.1 billion yuan loss in 2014, according to a median estimate of
analysts in a Bloomberg survey.
Delayed
Salaries
Rongsheng now relies on its remaining 8,000
workers to build the world’s biggest cargo ships for Brazil’s iron-ore producer
Vale SA and Oman Shipping Co., as well as smaller vessels and oil tankers.
Workers in its shipyards, mostly from other parts of China, and local staff in
its Shanghai office have had their salaries delayed, sometimes by two months, a
person with knowledge of the matter said.
“I can still manage to survive by cutting
expenses here and there, but many migrant workers can’t -- not with only 20
yuan in their pockets and not knowing their next payday,” said Liu Guojun, a
blue-uniformed dormitory maintenance and security worker who earns 2,000 yuan a
month. “There’s a surge in theft and other petty crimes around here as a
result.”
Rongsheng declined in an e-mail to answer
questions about its operations. Spokesmen for ICBC and China Construction Bank
Corp. declined to comment on the prospect of rising bad loans, while those at
Bank of China, Agricultural Bank of China Ltd. and China Development Bank
didn’t respond to requests.
Shipyard
Shutdowns
The pain is being experienced by Rongsheng’s
peers nationwide. A third of the country’s 1,600 shipyards may shut down within
five years amid a global vessel glut, Wang Jinlian, secretary general of the
China Association of the National Shipbuilding Industry, said in July.
To Ji Fenghua, chairman of Nantong Mingde
Heavy Industry Group Co., another struggling “Shipping Valley” builder
specializing in high-end vessels, that’s an understatement.
“I won’t be surprised if half of the shipbuilders
fail, given the excess capacity,” said Ji, recounting the day in July 2012 that
hundreds of his workers who hadn’t been paid in three months besieged his
office building.
Repaying
Banks
The company was strapped for cash as
state-backed banks recalled their loans after the banking regulator ordered
that new financing be stopped for shipbuilders and some other businesses.
Deprived of new credit to pay off old debts, Ji and his fellow founders emptied
their own bank accounts, collateralized their homes to banks and hit up
relatives and acquaintances for cash.
“Every cent of the money we earned and
borrowed was used to repay banks, leaving us nothing to pay workers or the
suppliers,” Li said. “We have banks to thank for our boom, and we have them to
blame for our doom.”
Mingde Heavy eventually survived the crisis
with government help. Its cash shortage continues even as the company continues
to take orders for stainless-steel chemical tankers.
The central government pledged 4 trillion yuan
in economic stimulus during the global financial crisis starting in 2008. In
2009, Export-Import Bank of China committed to 160 billion yuan of credit to
the nation’s two largest state-run shipbuilders, while Bank of China agreed to
help smaller and private companies, according to statements from banks.
Easy access to credit helped Chinese banks
churn out record profits and reduce bad-loan ratios to less than 1 percent as
of June 30 from 2.8 percent at the end of 2008.
‘Industrial
Glut’
“The 2008 stimulus exacerbated an industrial
glut that has been in existence since 2003,” S&P’s Liao said. “We expect
the government to take measured steps in a crackdown on overcapacity because
they need to weigh the impact on financial stability.”
Nonperforming loans at Chinese banks increased
for an eighth consecutive quarter in the three months ended Sept. 30 to 563.6
billion yuan, extending the longest streak in at least nine years. Still, they
account for just 0.97 percent of the nation’s outstanding loans, according to
the China Banking Regulatory Commission.
The bad-loan ratio could climb to as high as
1.5 percent in the next few quarters, according to Lian Ping, chief economist
at Shanghai-based Bank of Communications Co. Most of the increase, he said,
will come from the provinces of Jiangsu, where Nantong is located, and
Zhejiang, south of Shanghai, where small businesses have been hit hard by the
slowdown.
Turning
Tide
In the first six months of this year, soured
loans increased by 18 billion yuan in Jiangsu, more than any other Chinese
province, followed by Zhejiang and Shanghai, the official Xinhua News Agency
reported.
“There are many capital-and-labor-intensive
industries that have relied on bank loans and policy support for their past
success,” Lian of the Bank of Communications said. “But now the tide is turning
against them.”
Shipbuilding isn’t the
only industry affected by overcapacity. Also in Jiangsu, about 130 kilometers
(80 miles) southwest of Nantong, Wuxi Suntech Power Co., the main unit of the
industry’s once-biggest supplier (STP:US),
went bankrupt with 9 billion yuan of debt to China’s largest banks, according
to a Nov. 12 report by Communist Party-owned Legal Daily. Suntech Power Holdings Co. (STPFQ:US),
the parent firm, defaulted on $541 million of offshore bonds to Wall Street
investors.
Solar
Panels
About 1 gigawatt of solar-panel production,
more than 40 percent of the company’s 2011 module manufacturing capacity, was
idled at one of two factories, according to a statement issued by Shunfeng
Photovoltaic International Ltd., which agreed to buy Wuxi Suntech on Nov. 1 for
3 billion yuan. A gigawatt is about as much as what a new nuclear reactor can
supply.
Government and banks’ support for the solar
industry since late 2008 has resulted in at least one factory producing
sun-powered products in half of China’s 600 cities, according to the China
Renewable Energy Society in Beijing. China Development Bank, the world’s largest
policy lender, alone lent more than 50 billion yuan to solar-panel makers as of
August 2012, data from the China Banking Association showed.
China accounts for seven of every 10 solar
panels produced worldwide. If they ran at full speed, the factories could
produce 49 gigawatts of solar panels a year, 10 times more than in 2008,
according to data compiled by Bloomberg. Overcapacity has driven down prices to
about 84 cents a watt, compared with $2 at the end of 2010. The slump forced
dozens of producers like Wuxi Suntech into bankruptcy.
‘Much
Worse’
An unidentified local bank reported a 33
percent nonperforming-loan ratio for the solar-panel industry, compared with 2
percent at the beginning of the year, with the increase due to Wuxi Suntech,
China Business News reported in September.
“The real situation is much worse than the
data showed” after talking to chief financial officers at industrial
manufacturers, said Wendy Tang, a Shanghai-based analyst at Northeast
Securities Co., who estimates the actual nonperforming-loan ratio to be as high
as 3 percent. “It will take at least one year or longer for these NPLs to
appear on banks’ books, and I haven’t seen the bottom of deterioration in
Jiangsu and Zhejiang yet.”
The Wuxi government in 2007 planned to build a
2.2-square-kilometer solar-panel park with projected sales of 100 billion yuan
by 2012. The area is now covered with weeds and construction waste, left
undeveloped because of overcapacity.
Steel,
Cement
The same is true in industries such as steel
and cement, which were named by the State Council as facing a “serious” glut.
China’s economic planners have sought to rein in the steel industry since at
least 2004, when work on a 10.6 billion yuan project in Jiangsu was halted.
Even so, annual capacity has risen to 970 million metric tons, according to the
steel association, exceeding the industry’s output by 35 percent in 2012. China
produces seven times more than No. 2 Japan.
About 10 million tons of aluminum production
capacity is being built at a time when the industry incurred combined losses of
670 million yuan in the first half, with some producers in central and eastern
China facing severe losses, the Ministry of Industry of Information Technology
said in July.
That month the ministry ordered more than
1,400 companies in 19 industries including steel, ferro alloys and cement to
cut excess production capacity this year, an indication that the government is
pursuing pledges to fix fundamental issues in the economy even as growth slows.
Excess capacity was supposed to be idled by September and eliminated by
year-end.
China’s land ministry yesterday told local
authorities to ban allocations for any new production projects by overcapacity
industries including steel and shipbuilding, the official Xinhua News Agency
reported.
Hawkish
Tone
“The central government is hawkish in its
tone, but when it comes to execution by local governments, the enforcement will
be much softer,” Bank of Communications’ Lian said. “Many of these firms are
major job providers and taxpayers, so the local government will try all means
to save them and help them repay bank loans.”
When hundreds of unpaid Mingde Heavy workers
took to the streets for a second time last November, the local government
stepped in by lining up other firms to vouch for Mingde so banks would renew
its loans. Mingde Heavy avoided failure by entering into an alliance with a
shipping unit of government-controlled Jiangsu Sainty Corp., which also imports
and exports apparel.
Mother-in-Law
“I have everything I need to become a top-tier
shipbuilder but the money,” said Ji, Mingde’s chairman. “I used to be proud
that we are an independent, private company without government interference.
Not anymore. The pressure is much less when you have a rich mother-in-law.”
Under President Xi Jinping’s reforms laid out
last week, the private sector will be boosted by looser state controls, while
local government officials will be evaluated not only on increases in GDP but
also on indicators such as energy consumption, overcapacity and new debt.
China’s lending spree has created a debt
burden similar in magnitude to the one that pushed Asian nations into crisis in
the late 1990s, according to Fitch Ratings.
As companies take on more debt, the efficiency
of credit use has deteriorated. Since 2009, for every yuan of credit issued,
China’s GDP grew by an average 0.4 yuan, while the pre-2009 average was 0.8
yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C.
Bernstein & Co.
Credit
Cycle
“If credit allocation in China improves, the
ultimate credit cycle and economy downturn will be mitigated,” Werner wrote in
an Oct. 21 note to investors. “However, if China continues to rely on debt to
fund its economic growth, the country’s ultimate credit cycle will be more
severe.”
Based on current valuations, investors are
pricing in a scenario where nonperforming loans at the largest Chinese banks
will make up more than 15 percent of their loan books, according to Werner, who
forecasts a 2.5 percent to 3.5 percent bad-loan ratio by the end of 2015. A further
decline in GDP growth would lead to more soured loans and weaker earnings, he
said.
Lenders so far haven’t reported significant
deterioration in loan quality. Bank of China said it had 251.3 billion yuan of
loans to industries suffering from overcapacity as of the end of June,
accounting for 3 percent of the total. Its nonperforming-loan ratio for those
businesses stood at 0.93 percent, the same level reported for the entire bank.
At China Construction Bank, loans to
industries with overcapacity fell about 8 billion yuan in the first half of the
year to 180.8 billion yuan, while at Bank of Communications, the amount was 72
billion yuan or 2.3 percent of the total, the banks reported.
Dividends
Curbed
Credit growth may slow over the next year and
a half from the 20 percent to 25 percent gains in recent years to about 15
percent, Josh Klaczek, head of Asia financial services for JPMorgan Chase &
Co., said in July. The expansion of nonperforming loans will depress profits
and curb the ability of banks to increase dividends, and if more loans sour,
lenders may need to raise capital, he said.
“Banks currently have the ability to absorb a
decent amount of bad loans, and local government involvement will slow the
speed of NPL increases,” S&P’s Liao said.
While China’s cabinet in July urged mergers
and curbs in the shipbuilding industry, it called for continued financial
support to help “quality companies” maintain their operations.
In Nantong, handmade-noodle-shop owner Ma
Shuntian said he’s still a believer, even after losing 50,000 yuan this year.
Ma and his wife pumped almost 1 million yuan into the restaurant five years ago
after selling everything they had in Qinghai province and moving to the area
where Rongsheng’s workers reside. In a good year, selling noodles brought in
more than 100,000 yuan in profit.
“I hope Rongsheng can come through this crisis
and the town comes back to life,” said Ma, a father of three. “If they earn big
money, I can earn small.”
To contact Bloomberg News staff for this
story: Jun Luo in Shanghai at jluo6@bloomberg.net; Jasmine Wang in Hong Kong at
jwang513@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net
To contact the editor responsible for this
story: Chitra Somayaji at csomayaji@bloomberg.net
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