Bloomberg News

China Developer’s 20% Loan After Bank Rebuff Signals Risk

September 17, 2013

Chinese Yuan

A woman holds yuan banknotes in Beijing. Photographer: Stefen Chow/Bloomberg

China property developer Zhang Fuguo was rejected by banks for a loan to help keep building two office towers in the central city of Zhengzhou. So he turned to a manufacturer of water and gas meters.

The 50 million yuan ($8.2 million) loan last month at a 20 percent interest rate will help Zhang pay workers and buy materials and was like “delivering coal on a snowy day,” he said. It was less so for one board member at lender Henan Suntront Technology Co. (300259), who abstained from approval on concern that Zhang’s company would fail to repay the debt.

So-called entrusted loans, in which banks are “entrusted” with funds as middlemen between companies, increasingly grease the wheels of China’s economy, withstanding a crackdown on shadow banking this year and rising to a record 293.8 billion yuan in August. The increase was part of a surge in non-bank credit that may add to default risks threatening Premier Li Keqiang’s efforts to sustain 7 percent expansion this decade.

“The more that we have financial activity taking place in the shadow-banking system, under the current regulatory standards and regime, the more risky that it is,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong.

Entrusted loans and other financing outside the main banking system are “not so well regulated,” and “people who hold the assets don’t always understand and don’t always know where the money is actually being used,” said Kuijs, who previously was a World Bank economist in Beijing.

Record Streak

The increase in aggregate financing followed an unprecedented four straight month-on-month declines and the government’s signal that it would defend the year’s 7.5 percent expansion goal after two quarterly slowdowns.

Li, who’s preparing for a Communist Party meeting in November on economic-policy reforms, said Sept. 11 that the nation is taking steps to stabilize expansion and can achieve the main economic targets this year.

Shadow lending, which allows banks to bypass controls and capital requirements, may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan Chase & Co. estimated in May.

The entrusted loans in August were equivalent to 41 percent of the month’s 711.3 billion yuan in new local-currency bank loans. That’s the second-highest percentage in the past five years.

Both types of lending are part of aggregate financing, the government’s broadest measure of credit, which almost doubled to 1.57 trillion yuan last month from July, People’s Bank of China data showed.

Home Prices

A separate report today from the statistics bureau showed new home prices in China’s four major cities rose in August by the most since January 2011, on expectations that the government won’t implement new nationwide property curbs any time soon.

Elsewhere in the world today, New Zealand’s current-account deficit was 4.3 percent of gross domestic product in the 12 months through June, compared with economists’ estimate of 4.8 percent, a report showed. Malaysia will report inflation data for August.

The U.S. Federal Reserve concludes a two-day meeting in Washington. Analysts are divided on the amount by which the Fed probably will scale back its monthly Treasury purchases, with 33 of 64 predicting a reduction of $5 billion or less, and the rest forecasting a cut of $10 billion or more.

China regulators, in an effort to clamp down on speculative lending after a record credit boom in the first quarter, allowed a cash crunch in June that sent money-market interest rates to record highs. It had little effect on entrusted loans, which accounted for about 24 percent of total credit in July, the highest proportion since 2007, before dipping to 19 percent in August.

Growth Positive

“In the short term it is positive for growth,” said Dong Tao, head of economics for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “However, compared with bank loans it has less transparency and bigger risks. It is a blind spot of regulation.”

Tao said the August pickup in credit shows that “quietly, shadow-banking channels opened again” as the government softened its regulatory stance.

The government says debt risks are manageable. Vice Finance Minister Zhu Guangyao said earlier this month at a Group of 20 nations summit in St. Petersburg, Russia, that while China should strengthen supervision of shadow banking, officials are aware that smaller businesses need access to finance.

Temporary Increase

RBS’s Kuijs said the increase in credit will probably prove temporary because key people such as the premier “are telling us that they do not want to go in that direction.”

Lenders include Ningbo Yunsheng (Group) Co. (600366), a magnet maker, and Shanghai Tunnel Engineering Co., a local government’s infrastructure-construction arm. At least 110 publicly-traded companies announced plans to lend about 20 billion yuan to other firms in the first half, charging annual interest rates ranging from 7 percent to 12 percent, according to Shanghai Wusetu Mortgage Service Co.

Zhu Haibin, chief China economist at JPMorgan in Hong Kong, said entrusted loans reflect demand from companies to support operations, and one month’s increase “may not be a big problem.”

The complex being built by Zhang, the developer in Zhengzhou, is called Yuxi, or Imperial Seal. On Sept. 13, sounds of drilling and hammering of construction machinery emanated from the site as two yellow cranes carried materials.

Billboards enclosing the two unfinished concrete towers of about 16 and 25 stories advertised the property as the “heart of a city, vibrant metropolis,” as cars and buses inched forward in rush-hour traffic around the site.

Corporate Interests

Suntront, the meter maker, said in a July 31 filing with the Shenzhen Stock Exchange that the one-year loan to Zhang’s company, Henan Fuguo Property Co., will improve the manufacturer’s returns and won’t harm corporate or shareholder interests. “The entrusted loan has sufficient guarantees from buildings under construction as collateral,” Suntront said.

Li Shuqu, the Suntront director who abstained from approving the loan, cited Henan Fuguo’s liability-to-asset ratio of about 65 percent, net assets of 78.4 million yuan, losses and lack of revenue, according to Suntront.

Zhang said in a telephone interview that banks had turned down his loan application because of restrictions on lending to property developers.

“Money will flow in once sales officially start,” he said. “With the loan, I am fully confident about the financial prospects.”

--Zhou Xin, Shen Hu, with assistance from William Bi in Zhengzhou, China, Luo Jun in Shanghai, Karl Lester M. Yap in Manila and Rina Chandran in Singapore. Editors: Scott Lanman, Sunil Jagtiani

To contact Bloomberg News staff for this story: Zhou Xin in Beijing at xzhou68@bloomberg.net Shen Hu in Beijing at hshen33@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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