Chinese companies are getting more creative in the business of money lending as they struggle to keep profits ticking over in a cooling economy, raising concerns they are adding to the mountain of debt risks building in the world's No 2 economy.
Big state companies in industries struggling with overcapacity but with easy access to credit are borrowing funds, not to invest in their business but to lend to smaller firms, sometimes at several times the official interest rate, part of an informal lending market that mainland authorities are taking aim at.
The People's Bank of China increased pressure on banks to rein in such informal lending and speculative trading last week in money markets, letting short-term interest rates spike to extraordinary levels.
In the US$3.7 trillion "shadow banking" market, the fastest growing area is in so-called entrusted loans, which are arranged by banks on the companies' behalf, and in bankers' acceptance notes, tradeable securities that give a steady flow of cash.
Issuance of entrusted loans and bankers' acceptance notes has more than doubled to 1.6 trillion yuan (HK$2 trillion) in the first four months of this year from 636 billion yuan a year ago.
"Can we use the money to expand production? Definitely not," said a deputy general manager at a state-owned steel firm in eastern Shandong province, speaking on condition of anonymity.
"We will lose more if we produce more. We can only rely on other channels," he added, noting the firm loses an average 100 yuan to 200 yuan per tonne of steel sold.
China's economic growth is widely expected to slow further in the current quarter as exporters struggle with weak global markets, making lending money an increasingly attractive business option.
But there are concerns that some of the money is going into areas the government would rather it did not, for example real estate speculation, raising the risk of it turning bad while not helping the economy out of its current slowdown.
Indeed, debt is shaping up to be the mainland's biggest financial problem. The cabinet has said it would control the flow of new money into industries struggling with overcapacity. Beijing worries the shadow banking market is creating asset-price bubbles, and the central bank has tried to put a barrier in recent weeks by declining to inject major funds into money markets.
The shadow banking system has arisen because mainstream banking is focused on the needs of big state-owned enterprises.
Ratings agency S&P estimated that outstanding shadow banking credit had totalled US$3.7 trillion at the end of 2012, equal to 44 per cent of gross domestic product.
Fitch has put it at about 60 per cent, saying "torrid growth" has made the total of all forms of credit, including regular lending, shadow and hidden underground lending, as much as 200 per cent of GDP.
"This is a very, very big problem for the economy," said Wei Yao, China economist at Societe Generale in Hong Kong.
"The existence of all these arbitrage efforts shows that in the real economy, there are few opportunities. You've limited all the opportunities for real growth, then you open a window in the financial markets; of course everyone goes there."
With entrusted loans, a company provides the funds but, to circumvent a ban on direct lending to other firms, it designates a commercial bank to lend the money to a specific borrower.
The lender stipulates the amount, tenor, and rate of the loan, while the banks earn fees from both sides without the loans showing up on balance sheets.
Average new entrusted loans per month totalled 179 billion yuan in the first four months of 2013 and 106 billion yuan in 2012.
The steel company manager said he borrows from banks at about the 6 per cent official rate, then issues an entrusted loan to a borrower at up to twice that rate.
The general manager of a local government-controlled glass company in the northern province of Hebei said his company has increased the use of such practices as business slowed, lending about 30 million yuan to 40 million yuan so far this year at 6 per cent to 7 per cent mainly to related firms.
Some private companies are also cashing in. Zhejiang Longsheng Group, a specialty chemicals maker based near Shanghai, detailed 50 entrusted loans worth three billion yuan outstanding in its 2012 annual report.
The company lent to subsidiaries at rates of 6 per cent to 7 per cent, but unrelated companies were charged as much as 25 per cent.
It said one of the loans, with a rate of 20 per cent, would be rolled over as the borrower had difficulty repaying it.