Small Businesses in Jiangsu Singing the Bank Loan Blues; Lenders burned by bad loans to giants in solar and shipbuilding industries are reluctant to extend loans to family businesses as ordered, forcing some to close

08.07.2013 19:38

Small Businesses in Jiangsu Singing the Bank Loan Blues

Lenders burned by bad loans to giants in solar and shipbuilding industries are reluctant to extend loans to family businesses as ordered, forcing some to close

By intern reporter Wu Hongyuran

Several textile company owners in southern Jiangsu gathered for a meeting on July 25 to figure out how to save their businesses. One of them said local banks had been unwilling to lend since April, making life extremely hard for her and others who also run a family business in Shengze, a silk town in Suzhou, the capital of the eastern province of Jiangsu. Shengze hosts more than 6,000 small and medium-sized textile companies and a great number of spinning mills in its 118 square kilometers. Having run a business there smoothly for five years, the businesswoman at the meeting said it had become very difficult to raise funds in the past few months. These sentiments were expressed by the other businesspeople who attended the meeting.The province is an example of problems seen elsewhere in the country. Rising bad loans tied to faltering steel trading and solar and shipbuilding industries weigh on banks. This comes just as the central government has required banks to make more loans to small and family businesses, but this is easier said than done.

Bankers say their hands are tied because bad loans – from whales and minnows alike – are on the rise. Rural commercial banks are often the largest creditors of small and family businesses, but their loan quality has also deteriorated fast.

The financial statements of five rural commercial banks in Jiangsu painted a picture of the lenders’ plight: all of them had a surge in bad loans last year, ranging from 56.3 to 177.2 percent year on year.

A vice president of a rural commercial bank in southern Jiangsu, who declined to be named, said most of the bad loans taken on by rural commercial banks in the region were owed by small private companies.

Most of those companies are in traditional manufacturing and their profit margins are too thin to absorb even a slight increase in capital costs, he said. Many had trouble repaying debt because they had been deeply involved in private lending.

Jiangsu has more small-loan companies than any other part of the country. But many of them walk a fine line between running a normal business and charging exorbitant interest payments for shady loans, the manager of a local small-loan company said.

In the good times, many textile company owners were tempted to raise more money than their business needed, another small lender’s executive said. Those who treated their companies as a financing vehicle were having an especially hard time making ends meet under current conditions of tight liquidity, he said.

Hungry for cash, some businessmen have turned to credit cards. An executive of a joint-stock bank’s branch in Suzhou said some small companies had colluded with bank clerks – bribing them if they had to – so they could sign contracts that enabled the cardholder to take out overdrafts of up to 990,000 yuan.

The interest rate on the credit card loans can be very high, running up to 18 percent annually in some cases, said Jin Lin, a banking analyst with Oriental Securities. But when all other borrowing channels have been shut off, the owner of a cash-strapped business would pay anything to turn on the cash spigot again.

Blame for All

Throughout Jiangsu, the bad loan problem is not limited to the textile industry. The province is home to a great number of large corporations involved in steel trading, solar energy and ship manufacturing. All of them have been hit hard by the economic slowdown.

In the first five months of the year, the province accounted for about 40 percent of all new bad loans recorded nationwide, Zhou Xuedong, president of the central bank’s branch in Nanjing, said in June.

In Wuxi, a city near Shanghai, the amount of outstanding bank loans to steel trading companies is about 20 billion yuan. Several local bankers say that up to 70 percent of that is bad loans.

The China Banking Regulatory Commission’s office in Jiangsu is also worried about banks’ exposure to the solar energy and shipbuilding industries, a source close to the regulator said.

In a report published on July 30, the China Banking Association said these three areas should receive banks’ utmost attention in risk management because they were the strongest driver of bad loan increases this year.

A banking analyst familiar with the situation said many steel traders unable to repay loans are from Zhouning, a county in Fujian Province, also in the east. From 2004 to 2005, the steel market boomed and anyone from Zhouning could easily borrow millions of yuan from banks because they guaranteed loans for each other.

Typically, only a small portion of the money was actually spent on what it was intended for, he said. The rest ended up in speculative property investment and the private lending network. “When the steel market took a bad turn and banks tightened liquidity, the risk surfaced,” he said.

Both the borrowers and the banks are to blame, Dai Yuming, director of the banking regulator’s sub-branch in Wuxi, wrote in a July article. His said that half of all loans made by banks in the city to steel trading companies were in jeopardy of permanent loss.

All the lenders, especially the large ones, he wrote, should reflect on this.

Feeling the Pinch

Some banks have apparently tried to hide their bad loans. A source from one of China Minsheng Bank’s branches in Jiangsu said the bank had arranged for healthy companies to take over loans from those that could not afford to repay.

This allowed the bank to hide bad loans, he said, without giving details of the arrangements.

Some banks have also tried to sell their non-performing loans to asset management companies (AMCs).

A source close to the banking regulator’s Jiangsu office said this could be a promising way out of the trouble because several AMCs and other types of asset management institutions had shown interest in taking over bad bank loans.

In June, the first local government-backed AMC, Jiangsu Asset Management Co., was set up in Wuxi to tackle local financial institutions’ non-performing assets.

Two of the city’s champion enterprises, Suntech Power Holdings Co. and China Rongsheng Heavy Industries Group Holdings Ltd., are in trouble. The maker of solar panels, once a global leader, filed for bankruptcy protection in March. It owed nine banks at least 7.1 billion yuan. Rongsheng, a shipbuilder, is running short of cash to cover daily operations. In July, it started delaying payments to workers and suppliers, leading to protests.

With these big clients crumbing under their debt, the local banks are apparently not in the mood to expand credit lines to small companies, like those in the textile industry. The lack of money had driven many companies temporarily out of business, businessmen at the July 25 meeting said. One businessman at the meeting said the owners of some textile companies had disappeared, leaving debts unpaid.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: