Listed companies cash in from the cash-starved
Some 58 listed mainland companies lent more than 16 billion yuan (HK$19.55 billion) in the first eight months of this year in so-called entrusted loans to cash-starved, mostly small and medium-sized enterprises and real estate developers, to take advantage of high unofficial interest rates.
In such loans, a bank acts as an agent on a third-party loan between a depositor and a borrower, and books a fee.
As of August 26, the Shanghai and Shenzhen stock exchanges had issued 110 entrusted loan-related notices, for an accumulated total of more than 16 billion yuan, up 38 per cent year-on-year, according to Wind Information, a Shanghai-headquartered financial data provider.
The data compiled by Wind shows that 30 of the 58 companies were lending money, and receiving rates that comfortably exceeded the official bank rates, with the highest being paid 21.6 per cent interest on a 12-month loan, compared with a benchmark one-year interest rate of 6.56 per cent from a mainland bank.
'More listed companies are not focusing on their main business but are investing in other fields because the real economy is stagnant and it is easier to make a profit from high interest rates than from their core business,' said a Wind researcher.
'For the lenders, the return may be high, but the borrowers are often small companies so they had better be aware of the risk of default.'
China has lifted bank interest rates and deposit reserves to rein in its runaway inflation and mop up liquidity. Banks now have to put aside more than a fifth of their deposit base with the central bank, and live under loan ceilings imposed by Beijing.
'The phenomenon of entrusted loans has become quite prevalent and the risks are increasing,' said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences. 'Yes, the interest rates are high, but there's a reason for that: high returns mean high risk.'
Yi said that entrusted loans could potentially threaten the country's banking sector and Beijing was starting to focus on the issue.
According to the People's Bank of China, entrusted loans on the mainland increased by 702.8 billion yuan - 382.9 billion higher than the same period a year ago, representing a rise of 120 per cent.
Banks are keen to earn agents' fees from lining up deals between cash-rich listed companies and firms that need money but find it hard to borrow through normal channels.
Companies also like the high yields available through entrusted loans. For example, Wind Info data shows that Wuhan Jianmin Pharmaceutical Groups provided 150 million yuan as entrusted lending at an annual interest rate of 20 per cent. This generated 30 million yuan in interest income, compared to interim net profit this year of 36.2 million yuan.