Funding plans suffer despite ambiguous signals on need to keep loans flowing The mainland government's measures to cool the overheating economy have forced Beijing Metal Consulting to look overseas to raise capital for steel-producing clients for the first time, as the credit crunch leaves smaller plants little chance of obtaining bank loans. One client, a private steel company in Henan province, is able to produce only half its annual one-million-tonne capacity because of a lack of capital, according to Beijing Metal president Zhongbo Xu. Plans for the company to build a new one-million-tonne plant have been shelved for the same reason. 'They have no cash flow to buy raw materials' and invest in new plants, Mr Xu said. In Guangdong, the tale is similar. 'We haven't been able to get any bank loans this year,' said Liang Guifang, financial manager with Guangzhou Panyu Yufeng Iron & Steel Co, one of Guangdong's biggest private steel companies. 'Small companies are likely to be squeezed out.' The woes come as regulators, while controlling lending, have also warned Chinese banks of the need to keep loans flowing to avoid a sharp slowdown in the economy. China needs to maintain about 7 per cent economic growth to create sufficient jobs to avoid social unrest. 'We must not slam on the brakes,' warned Liu Mingkang, chairman of the China Banking Regulatory Commission, following the regulator's four-day meeting this week. Apart from steel, the central government has targeted industries, such as commodities, vehicles and property. The string of new policies has effectively restricted new loans, reflected in the latest set of data from the central bank. Monthly new loan growth fell to 0.7 per cent last month, its lowest level since November last year, government statistics showed. New loans rose 18.5 per cent in May, down from 21.1 per cent growth in December. In May, the money supply, measured by M2, rose 17.5 per cent year over year, 1.6 percentage points slower than April's rise. The cooling measures have also shown up in the latest investment numbers in the steel industry, with investment growth falling 22 percentage points to 76.6 per cent in the first five months of this year. This compares with 96.2 per cent for the year-earlier period. Companies are cautioning that the macro-economic policies are forcing plant closures, lower output and even bankruptcies. 'In a year, you will see a lot of bankruptcies,' said Patrick Parsons, sales and marketing director with China Central Place, a large office project in Beijing's central business district. Property is another sector running into roadblocks and is expected to have a widespread effect on growth. 'Loans are much harder to get,' said Mr Parsons. A recent auction of land in Beijing attracted just three bidders, even though 30 companies had requested documents. Developers blamed a cash shortage among small companies for the small turnout. On the other hand, larger companies in many industries argue that the loan restrictions will eliminate the smaller, less efficient companies, allowing better capitalised giants to survive. An official at Maanshan Iron & Steel's corporate secretariat said Beijing's macro-economic measures had dampened demand for steel products and depressed steel prices. On average, the company's prices dropped 15 to 20 per cent last month, compared with April, he said. But he said credit tightening was a good means to squeeze out inefficient steel mills and streamline the industry.