China rolling government and steel debt?

Chinese banks are selectively rolling over debts owed by local government financing vehicles (LGFVs), provided that these LGFVs have sustainable cash flow and good collateral, according to First Financial Daily.

One source from Industrial and Commercial Bank (ICBC) said that the bank is effectively rolling over and restructuring some of the debts owed by LGFVs so long as the value of the collateral remains above the loan value and that the project is 60% or more completed.  Meanwhile, Bank of Shanghai said they have been rolling over LGFVs debts, and in some cases extending more credits, if the LGFVs in question have sustainable cash flow.

One Shanghai’s LGFV, Shanghai Chengtou, for instance, has recently obtained a RMB20 billion credit line with Bank of Shanghai.  Incidentally, this very LGFV bears the same name of another Shanghai’s LGFV which was reportedly asking banks to roll-over its debts last year (although last year, they emphatically denied that they have requested any roll-over or attempted default, whatever).

However, the report suggests that as the China Banking Regulatory Commission (CBRC) ordered banks to manage the credit risks of LGFVs, banks are only helping LGFVs which are in good financial condition (such as thsat mentioned above). Meanwhile, LGFVs are turning to the bond market and trusts companies for financing as banks are not as willing as they were to lend. Sources cited in First Financial Daily even said that trusts are currently the biggest source of financing for some LGFVs in Tianjin in others. But as I said, trust companies are part of the shadow banking system, and these trust products may turn out to be financed indirectly by banks, sometimes possibly off-balance sheet.  As local governments are currently pushing out a lot of massive plans for investment projects to stabilise economic growth, funding requirements will probably increase in the near-future. We believe that as long as the central government is willing to let all these projects to go ahead, banks will remain the key for funding these projects. At the present moment, however, some believe that the massive funding requirement from new projects and repayment of previous loans may force some local governments into borrowing from trusts.

The fact that banks might be rolling over debts is not new.  Early this year, Financial Times reported that Chinese banks were asked to roll over debts owed by LGFVs.  In other words, some of these LGFVs which are unable to repay principle on their loans are having maturities extended to avoid becoming non-performing.  The fact that some presumably bad debts are being rolled over instead of being classified as bad debts contributed to the low non-performing loans ratios at major banks that have announced results, in my view.  Ultimately, many of the LGFVs will be unable to service their debts no matter what, rolling over debts merely delays the problems of massive non-performing loans from becoming official.

I also read something related from Yangcheng Evening News regarding banks possibly rolling over the debts owed by steel companies.  Based on the first half results of these steel companies, besides the fact that short-term loans are all increasing:

… more and more companies’ cash flow statement are showing similar numbers for  the items “debt repayment” and “cash raised from new loans”, as though old debts were being swapped into new debts.  For example, Magang raised RMB21.92 billion from new loans, and repaid RMB22.59 billion.  Ling Yuan Iron and Steel raised RMB2.8 billion from new loans, and repaid RMB2.93 billion…

Apparently, according to the report, quite a number of steel companies are reporting similar phenomenon where new loans and debt repayments deviated by less than 10%, and it seems that the last time this happened was in 2009.

This is almost anecdotal, thus, take that with a grain of salt.

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