News / Asia

China Defaults Mount Among Inter-company Loans

Reuters
Chinese companies that have lent money to other companies are facing a potential wave of defaults, with several listed firms already reporting missed loan repayments.
 
Shipbuilder Sainty Marine on Tuesday became the latest listed firm to report that it had failed to receive principal and interest repayments on a 900 million yuan ($144.7  million) loan to a property developer.
 
The same day, Qiaqia Food Co announced that it would launch a lawsuit against another food producer for failing to pay interest on a 40 million yuan ($6.4 million) loan.
 
Chinese companies granted a net 2.55 trillion yuan ($411 billion) in so-called entrusted loans in 2013, nearly double the 1.28 trillion yuan total in 2012, making them the second-biggest source of domestic credit behind bank loans, according to Reuters' calculations based on published central bank data.
 
Entrusted loans require banks to serve as an intermediary, but a company serves as the ultimate lender and records the loan asset on its balance sheet.
 
“Companies offering entrusted loans typically want to lend while bypassing official restrictions for credit, such as lending quotas,” said Zhang Weigang, head of investment at Shanghai Securities. “That means they typically lend to risky industries such as property, solar panel manufacturing and non-ferrous metals.”
 
Entrusted loans are just one of several channels through which non-financial firms offer credit to one another, Zhang said. Other methods include corporate discounting of bank acceptance bills, as well as corporate purchases of trust products, which are usually backed by high-interest corporate loans.
 
Solar black spot
 
The recent string of defaults was first reported by 21st Century Business Herald, a Chinese newspaper.
 
Sainty Marine's potential loss came on an entrusted loan extended to Nanjing Fudi Real Estate Development Co in late 2012 with a maturity of 18 months, according to the lender's filing. The developer missed a required principal and interest payment worth 1.05 billion yuan, implying an annual interest rate of more than 11 percent.
 
Real estate developers in smaller Chinese cities nationwide are struggling with oversupply, leading to stagnant or falling prices.
 
The boss of Nanjing Fudi ran away in June, and the company's main development project remains unfinished, with the construction site sealed off behind a brick wall, the official Shanghai Securities News reported on Tuesday. The company couldn't be reached for comment.
 
At least four other companies have reported failure to receive interest or principal payments on entrusted loans worth 224 million yuan since February, according to exchange filings.
 
Hubei Yihua Chemical Industry Co and Ningbo Bird Co Ltd, which produces mobile phones, are also holding unpaid loans to real estate developers.
 
Solar equipment-makers Baoding Tianwei Baobian Electric Co Ltd and Sichuan Chuantou Energy Co failed to receive payments due on entrusted loans to their own subsidiaries, according to their stock exchange filings.
 
China's struggling solar sector produced China's first-ever domestic bond default last month when Shanghai Chaori Solar Energy Science and Technology Co Ltd missed an interest payment.
 
Tianwei Baobian itself has a bond interest payment due in July. That bond is currently trading at a nearly 18 percent discount to par value, indicating that investors are concerned about default risk.
 
While risk is mounting, there are no signs of listed companies losing enthusiasm for offering entrusted loans. Just this week, Lingyun Industrial Corp Ltd, Atlantic China Welding Consumables Inc and Tianjin Songjiang Co Ltd all announced new entrusted loans.

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