China warned banks about steel companies’ credit risks while approving steel projects5 June, 2012, 2:08. Posted by Zarathustra
We have already heard previously that China wants to stimulate the economy again by bringing investment projects forward, and one of the projects that has been approved (and indeed started) is steel project. In fact, there are more than one steel projects being approved. Yet there has been so much excess capacity, inventory of iron ores and others, that even though the local governments are often committed to close down other steel mills so that the new ones could be approved, it is hardly ever convincing that this could ever remove enough excess capacity, not to mention the slowing demand due to the slowing real estate investment.
Anyway, so the Chinese government has approved a few steel projects, yet they are now asking banks not to lend to steel companies because steel companies may have high credit risks. In fact, it is very common for companies to purchase steel with loans, and those steels would then be used as collateral to borrow even more. Financial Times is reporting that a directive dated on 26 April which was never published warned banks of the credit risks of steel companies:
China has warned its banks of rampant illicit borrowing by steel companies, a development that underscores the financial dangers for the country as the government mulls a new stimulus effort to support the slowing economy.
Some Chinese steel trading companies have borrowed excessively from banks and then used the funds to speculate on property and stocks, the bank regulator said in a directive that was seen by the Financial Times. The regulator added that banks must be more vigilant in lending to the companies.
This is a complete contradiction to the later plan to stimulate the economy by bringing investment forward, in particular, a few steel projects. Perhaps this directive that warned banks against lending to steel companies will be ignored because of the stimulus. Or not.