Can’t Get a Bank Loan? Chinese State Owned Companies Happy to Help Out

Date:2011-09-06lile  Text Size:

Chinese companies with idle cash on their books are keener to lend money out at premium rates rather than invest it in their businesses.

Beijing’s anti-inflation measures may have slowed business momentum in industries ranging from property to manufacturing, but they have opened up an opportunity for cash-rich state-owned enterprises as hundreds of thousands of small firms are turning to high-yielding private loans for survival.

In the first eight months of this year, 40 listed companies lent a combined 8 billion yuan ($1.25 billion) to cash-strapped firms while 22 listed companies borrowed 12 billion from their state parents, according to stock exchange filings and numbers from data provider Wind Information Inc. The highest interest rate on the transactions reached 24.5%, nearly four times the one-year benchmark lending rate.

More tellingly, central bank data show that while the new yuan loans issued by banks fell 10% year-on-year to 4.17 trillion yuan in the first half of 2011, the amount of new borrowing between companies more than doubled year-on-year to 702.8 billion yuan.

Direct borrowing and lending between companies is technically banned in China, but companies can lend their money to designated borrowers through banks. Interest rates are decided by companies, while banks, acting as intermediary, collect fees without taking on any of the credit risk.

For some listed firms, intercompany lending has been an important source of revenue. For example, between January and June, retail company Sunny Loan Top Co. earned 55.5 million yuan from its lending business, accounting for 85% of the company’s net profits during the period, according to the company’s semi-annual report (pdf). Meanwhile, Wuhan Jianmin Pharmaceutical Group Co. in February lent 150 million yuan to a hotel operator at an annualized interest rate of 20% in a deal that accounted for roughly a third of its first-half net income (pdf).

For companies to lend out money rather than use it for investment is neither new nor unusual in China. The Chinese government long addressed inflation by slamming the door on bank lending, which typically puts the squeeze on small private firms and encourages them to turn to the informal lending market.

One of the most impressive examples of a company choosing to lend out is cash is Tsingtao Brewery Co., which became China’s first dual-listed state-owned company and the first Chinese state-owned company to list on the Hong Kong Stock Exchange after raising roughly 1 billion yuan through IPOs in Shanghai and Hong Kong in 1993. Within two years of those offerings, the beer maker had loaned out nearly all of the money, which was supposed to have been spent on expanding its breweries.

At the time, China was under a severe credit squeeze as Beijing struggled to bring down inflation as high as 24%.

Though not as strong as in was the mid-1990s, China’s inflation a three-year high of 6.5% in July and is widely expected to remain at high levels for some time. In addition, a frothy property market and volatile global markets mean China is facing a more complicated situation this time around.

To rein in rapid rises in consumer and housing prices and fend off speculative capital inflows, the government has raised benchmark interest rates five times and increased the proportion of deposits banks must keep with the central bank nine times since the last quarter of 2010.

The tightening measures have resulted in a credit squeeze in the banking system, making capital pricier for companies, especially small private firms and property developers.

Though small businesses account for about 80% of China’s urban employment, it’s difficult for them to get loans from banks in times of tightening as they are more vulnerable to the slowing economy.

Currently, “around 90% of China’s small and medium-sized enterprises rely on the private financing system, making it very popular,” the official Xinhua News Agency recently quoted Gu Shengzu, a senior member of China’s parliament as saying.

In some areas, interest rates on private financing markets have risen to 120% on an annualized basis, Gu said.

Real-estate companies, pinched by higher funding costs as growing public discontent over surging housing prices has prompted the government to tighten credit policy for developers, are another feeder at the trough of private financing. Roughly 30% of the 20 billion yuan in new borrowing revealed revealed by stock exchange filings and the data from Wind Information went to fund property firms, with developers typically paying interest rates of at least 12%.

In addition, there are signs that the credit crunch in the banking system has hit some blue chip developers who are keeping sales prices on hold despite worsening cash flows. Cofco Property (Group) Co., a subsidiary of China’s largest food manufacturer Cofco Group, said in July that it got a three-year credit line of 3.7 billion yuan from six of its sister companies (pdf).

“The internal transaction highlights the financial support of the shareholder for the listed company in a circumstance in which property developers’ funding channels are restricted by the country’s strengthening macro-controls in the real-estate industry,” said Cofco Property.

Guo Tianyong, director of China Banking Institute at the Central University of Finance and Economics, said it’s not unusual to see the sharp increase in intercompany lending given China is putting the brake on bank lending.

“The intercompany lending has its inevitability. But on the other hand, it’s to some extent setting back the government’s efforts to control aggregate demand (meaning total amount of demand for goods in the economy) and rein in inflation,” he said.

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