NewChinese state-backed firms face tighter borrowing rules overseas

Some banks are adopting stricter lending criteria for state-owned enterprises, demanding collateral from some companies they used to deem as safe as government debt, as Beijing tries to reform its bloated firms and the economy slows.

Singapore's DBS Group, which recently suffered a loss on a bad loan to an SOE-related firm it had assessed as risk-free, plans to launch a "decision grid" to assess the creditworthiness of SOEs, according to draft internal risk guidelines.

A banker at Taiwan's Chang Hwa Commercial Bank said since the beginning of the year his bank would only lend to state-owned mainland firms that provided collateral, recognising that SOEs were no longer risk-free.

Such changes in policy suggest some foreign banks are preparing for a rise in defaults in the world's second-largest economy, which grew last year at its slowest pace in 24 years and where the government is trying to make the state sector more efficient.

DBS will now lend more conservatively to SOEs seen as receiving less government support, as China plans to prioritise SOEs in strategic sectors. The January-dated DBS document said: "Not all SOEs receive the same degree of government support. It is our further belief that the differentiation of such support will widen in the future as the government continues to pursue market economy."

The changes at DBS and Chang Hwa are evidence of a broader trend to tighten lending in mainland China among foreign banks and the practice of demanding collateral is likely to rise to recover some value when loans go bad.