China’s banks told to stop lending to ‘zombie’ steel and coal firms
Only help the companies that can compete and go global, financial watchdogs tell lenders
China’s banks have been told to tighten lending to bloated coal and steel companies, cutting off loans to firms that cannot compete while keeping credit flowing to the ones that can perform.
The instruction, jointly issued by financial regulators on Thursday, comes as Beijing tries to cut industrial overcapacity and guide state-run firms out of a morass of debt.
But the shift will eliminate more than a million steelmaking and mining jobs and could undermine social stability, as the redundant workers struggle to learn the skills valued by the consumer-led economy.
“Steel and coal industries are the main area where China is trying to slash capacity and the circular underlines the financial regulators’ role in pushing forward the move,” said Lu Zhengwei, chief economist of Industrial Bank. “There is no need to worry about a resurgence of so-called zombie companies, as we have local governments and regulators taking a tough stance over driving out those companies on the verge of collapse,” Lu said.
Banks had a key role to play in weeding out the poor performers, according to the circular, which was released by the People’s Bank of China, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the China Securities Regulatory Commission.
Taking the scalpel not the right solution for China’s steel woes
Lenders should recognise that the industry, although mired in excess supply, remained a key driver of the economy, it said. Banks should continue to extend credit to companies that were competitive or could stage a turnaround and help with deleveraging. Financial service companies should also help healthy players go abroad, assisting in raising capital in overseas markets through share and bond issues, it said.
No credit should be extended to new projects that were not encouraged by current policy, it said.
China is trying to push forward supply-side reforms amid slower economic growth, and the heavily polluting, energy-intensive steel and coal industry has become a prime target. In February, Yin Weimin, the minister for human resources and social security, said the sector was expected to lose 1.8 million jobs, although no time frame was given.
Last month, thousands of miners at an ailing coal firm in the northern province of Heilongjiang took to the streets demanding back pay, forcing the governor to make public reassurances that the company would meet its salary obligations.
Miners’ protest: ailing Chinese coal firm Heilongjiang Longmay told to pay workers
China has already cut crude steel output by 90 million tonnes in recent years and intends to further reduce capacity by 100 million to 150 million tonnes in the coming five years.
That reduction was faster than what had occurred in Western counties, which took 25-30 years to make similar cuts, said Zhang Ji, assistant minister of the Ministry of Commerce, earlier this month.
Zhang hit back at accusations that China was to blame for a global glut of steel capacity, saying that although the country contributed about half the global amount, it consumed about 46 per cent of the total supply.
China’s steel exports have come under renewed scrutiny since India’s Tata Steel said it was putting its British plants up for sale. The move could undermine support in the European Union for granting China recognition as a market economy by year-end.
