Courtesy of Also Spracht Analyst.
We have already heard that China wants to stimulate the economy by bringing investment projects forward. One of the projects that has been approved (and indeed started) is a new steel plant. In fact, there is more than one steel project being approved. Yet there is already so much excess capacity, inventory of iron ore and others, that even though the local governments are often committed to closing down other steel mills so that the new ones can be approved, it is hardly ever convincing that this will remove enough excess capacity, not to mention the slowing demand due to the real estate bust.
Into this folly we now have the Chinese government asking banks not to lend to steel companies because they may have high credit risks. In fact, it is very common for companies to purchase steel with loans, and that steel is then used as collateral to borrow even more. The Financial Times is reporting that a directive dated on 26 April, which was never published, warned banks of the credit risks of steel companies:
China has warned its banks of rampant illicit borrowing by steel companies, a development that underscores the financial dangers for the country as the government mulls a new stimulus effort to support the slowing economy.
Some Chinese steel trading companies have borrowed excessively from banks and then used the funds to speculate on property and stocks, the bank regulator said in a directive that was seen by the Financial Times. The regulator added that banks must be more vigilant in lending to the companies.
This is a complete contradiction to the later plan to stimulate the economy by bringing investment forward, in particular, a few steel projects. Perhaps this directive that warned banks against lending to steel companies will be ignored because of the stimulus. Or not.
Either way, it tells you all you need to know about the sustainability of the Chinese growth model.