A recent Reuters article all too graphically highlights both the current state of the Chinese steel market and the follies indulged in by China’s banks at the urging of Beijing.
It serves also to underline the level to which the Chinese steel industry is indirectly supported by state aid in the form of easy credit, a subsidy Western steel producers and traders have not enjoyed for decades, and even then not to the extent that has gone on in China for the last few years.
Apparently, as bad debts among China’s steel trading community have spiraled, the banks have reacted to regulators’ concerns and clamped down hard on new lending.
Traders complain the banks have been underhanded in the process, calling in existing loans with the intimation that new ones would be made, then refusing any further lending once they have the original loans settled — not that many are getting settled, by the sound of it.
According to Reuters, by the end of last year China’s steel industry had a total debt burden of $400 billion; some of China’s leading mills alone owed $30-50 billion. For the time being, steel producers are continuing to enjoy the largesse of their political masters. As ever in China, it’s the independent private enterprises that are feeling the heat.
The news organization estimates something like half of Shanghai’s 12,000 steel trading firms have shut up shop, fled the country or just disappeared. Don’t shed a tear for the banks though – they made hay while the sun shone.
By all accounts, some were lending at rates of 24 percent per year to small- and medium-sized enterprises – four times the officially sanctioned level approved by Beijing.
Indeed, so copious was the flow of funds, traders’ defense in court has been that the banks almost forced the money on them, far in excess of that needed for investment in plant, equipment and for stock financing; so, traders being traders, they found other things to invest the cash in – mostly real estate and shares, both of which have since fallen sharply.
Interestingly, these debts do not show up as ‘non-performing’ unless the debt is overdue for more than 90 days and no interest has been paid on it, so by seizing assets the bank can show some of the debt has been paid down.
The landscape is not likely to get any better for China’s steel traders this side of the middle of the new year, with oversupply and weak prices likely to persist this year and into next.
Expect seats on planes leaving the country to remain at a premium then.