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Print Edition> Business
UPDATED: April 15, 2013 NO. 16 APRIL 18, 2013
Market Watch No. 16, 2013
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OPINION

Looming Bad Loans

The 2012 annual reports released by the five major Chinese banks showed the Yangtze River Delta Economic Region has been severely affected by bad loans. Take Agricultural Bank of China (ABC) and China Construction Bank (CCB) for example. Non-performing loans in the region accounted for 23 percent and 44.1 percent of the total, rising from 0.98 percent and 1.31 percent to 1.19 percent and 1.97 percent respectively.

The same is true for the manufacturing industry. Statistics show for CCB, ABC and Bank of China (BOC), the manufacturing industry made up 41 percent, 38.7 percent and 35.7 percent of total non-performing loans respectively.

In fact, alarm was sounded as early as 2011. According to the China Banking Regulatory Commission, the ratio of non-performing loans for small businesses had reached 2.02 percent by the end of 2011. The Yangtze River Delta Economic Region, which was harassed by private lending and struggling small and medium-sized enterprises, contributed much to the rebound in bad loans. In 2011, non-performing loans in Zhejiang Province surged 21 percent.

The Yangtze River Delta Economic Region is home to many cities featuring rapid economic growth, great economic aggregate and huge development potential. But now, bad loans are undermining the sustainability of the region.

Why was the region severely hit by bad loans? On the one hand, since the Chinese economy began to slow down in 2012, small and micro enterprises have been beset with problems like running below capacity, reduced orders and rising costs of raw materials and labor. Meanwhile, mired in a debt crisis because of excessive borrowing from private lenders, a number of enterprises have shut down with their owners taking flight. The spillover effects of the crisis threaten the security of banks credit capital.

On the other hand, many enterprises in the region have been depressed by ruptured debt chains. Since 2012, problematic debts in the Yangtze River Delta Economic Region have mostly taken the form of operational default, and the default of small and medium-sized enterprises and private enterprises has led to shrinking earnings, heavy losses, mounting accounts receivable and accounts payable and a prolonged capital return period. Affected by excess production capacity, price dropping and investment losses, industries like steel, machinery, coal and electricity are prone to new debts chain.

To achieve the sustainable development of the manufacturing industry in the region, focus should be laid on regional integration. With Shanghai as the leading force and Jiangsu and Zhejiang provinces as the two wings, regional industrial clusters should be formed to coordinate with each other, which will enhance the overall competitiveness of the manufacturing industry in the Yangtze River Delta.

Financial reforms underway in Wenzhou must continue, which will improve the financial environment and financial services of the Yangtze River Delta Economic Region. Commercial banks should strengthen credit risk management to prevent bad loans.

In addition, more effort should be made to optimize the structure of loans. In keeping with the principle of ensuring stable economic growth, more credit resources should go toward infrastructure, emerging industries of strategic importance, agriculture, and small and micro enterprises, in order to reduce financing difficulties in these sectors.

Last but not the least, there should be more transparency in credit ratings and information disclosures of enterprises and individuals, which will effectively reduce or even eradicate the evasion of bank debts and further improve the credit environment of the Yangtze River Delta Economic Region.

This is an edited excerpt of an article by Wang Yong, a professor from the Zhengzhou Training Institute of the People's Bank of China, published in Shanghai Securities News

THE MARKETS

More Outlets

Despite the recent slowdown in China's economic growth, German wholesale retailer Metro Cash & Carry is planning to open at least 12 outlets in China in 2013, following equally fast expansion the year before.

In 2012, Metro opened 12 stores in first- and second-tier cities. "This shows our long-term commitment to China," said Uwe Hoelzer, President of Metro China.

Metro China's sales revenue for 2012 increased 23 percent from the previous year to 1.89 billion euros ($2.46 billion). In comparison, the group's global sales increased only 1.7 percent to 32 billion euros ($41.87 billion).

Despite China's slowing economic growth, Metro China is confident that it can maintain stable growth in the nation. "We are still talking about GDP growth of 7 percent and the expectation is about 8 percent. So there is still enough growth, which underlines our strategy," said Hoelzer.

He believed increasing food safety problems also provide opportunities to Metro China because people in China are paying more attention to food quality, allowing his company to grab market share from wet markets, street markets and other international players.

Capital Adequacy

The Bank of Shanghai plans to raise about 15 billion yuan ($2.39 billion) through an initial public offering (IPO) in Hong Kong this year to supplement its capital, according to an internal document circulated to the bank's shareholders.

The lender also plans to raise another 15 billion yuan via a public listing on the mainland, without giving a timetable. The planned listings are subject to the approval of the China Securities Regulatory Commission.

The bank launched an IPO plan in 2008, but has yet to complete the program. The lender is now contemplating extending the validity of the plan to May 2014.

The Bank of Shanghai is among several Chinese companies looking to raise funds outside the mainland IPO market, which has been frozen since November 2012. Regulators said there isn't an immediate timetable to re-launch the domestic IPO channel. More than 800 companies are waiting to get approval to be listed in Shanghai and Shenzhen.

The bank is considering issuing 5 billion yuan ($807.5 million) worth of subordinated debt in the domestic market to replenish its capital, if the application for the IPO in Hong Kong is turned down. The plan is to raise its capital adequacy ratio to meet regulators' demands.

NUMBERS

$31.64 bln

M&A transaction value in the Chinese market in the first quarter of the year

204

Number of M&A cases in the first quarter. Of the total, 18 Chinese companies completed overseas M&As with a value of $16.65 billion

$16.62 bln

Value of M&As in the energy and mineral resources sector in the first three months of the year

Email us at: yushujun@bjreview.com



 
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