Loan trouble for China's private sector firms raises questions over rebalancing

Jake Cordell
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China's private sector firms often head to more informal banking channels to secure credit
China's private sector firms often head to more informal banking channels to secure credit (Source: Getty)

China's top economic planner has warned difficulties securing formal loans for the country's private sector firms poses a serious hurdle to its economic rebalancing.

Xu Kunlin, the head of China's National Development Reform Commission (NDRC), the state planning agency, told Reuters a sharp slowdown in private investment could sap momentum from the economy and hinted it should be made easier for the private sector to secure credit from China's official banking channels.

"Loan tenors are relatively long, the cost is relatively high and if you want to roll over a loan you run into lots of problems," Xu said in Beijing.

"Some companies aren't able to smoothly roll over loans so they have no choice but to turn to other fundraising avenues where the costs are even higher and that's when many companies run into lots of problems.

"This really is a serious issue."

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Duncan Innes-Ker, Asia regional director at the Economist Intelligence Unit told City A.M. the problems run deeper than just technical hurdles.

"Private firms have always had a tougher task getting hold of lending from the state-backed banks than state-owned enterprises have. A big part of that is to do with the fact that state-owned banks run themselves quite conservatively.

"But the bigger problem at the moment is that private sector firms are becoming more nervous about the economic outlook, and, as a result, demand for credit in the private sector has fallen. At the same time, you have state-owned enterprises that are increasing facing cash flow crunches and profitability has fallen off. They are essentially running to the banking sector to get the support they need to keep their operations running."

As a result, private firms head towards the looser-regulated informal banking network which comprises everything from loan sharks to shadow banks, Innes-Ker said.

A number of international bodies, including the International Monetary Fund (IMF) have put pressure on China to loosen its control of state-owned enterprises (SoEs), which are widely seen as a bottleneck on productivity and a source of potential future problems due to their high levels of debt. The EIU said there was a 40 per cent chance of China suffering a "hard landing", defined as GDP growth dropping by two percentage points on the previous year, before the end of the decade.

China's economy grew by 6.7 per cent in the second quarter of the year, according to official statistics, as government infrastructure spending and a frothy housing market helped the world's second largest economy defy expectations of a sharper slowdown.

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