Reuters reported that China banks are coming after the country steel traders hauling executives into court to chase down loans that some traders said they didn't initially need and can't now repay.
The heavy push to recover the loans is another sign of strain on China financial system at a time when the country leaders are contemplating another round of stimulus to boost the economy and when banks are worried about bad debts piling up.
The battle between the banks and steel traders also exposes flaws in the USD 629 billion stimulus round in 2008 and offers a warning to those calling for pumping more money into the system. At that time, Chinese banks threw money at the steel trade, a crucial cog in supplying the country massive construction and infrastructure growth.
But those steel loans, after offering a quick fix became excessive, poorly managed or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy and they had to put the money to work in real estate and the stock market.
Mr Li Huanhan the owner of Shanghai Shunze Steel Trading told a judge at a recent hearing that "After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn't need. We had nothing to do with the money, so we turned to other investments, like real estate."
While some loans did go towards equipment and expansion, executives admit money was also used for pet property projects, plush apartments and stock market bets.
According to the China Iron and Steel Association, by the end of last year, China steel industry had a total debt burden of USD 400 billion around the size of South Africa economy. Some of China leading mills alone owe CNY 200 billion to USD 300 billion.
The aggressive tack by China lenders many of which are state controlled comes as pressure builds inside a stretched financial system. Results at China big banks show profit growth is at its weakest since the global financial crisis while bad loans rose for a third straight quarter to CNY 456.5 billion by June, the China Banking Regulatory Commission said this month.
Steel traders are unlikely to be helping the bad loan issue with Shanghai steel futures having almost halved from their 2009 highs to below CNY 3,400 a tonne. As the steel market turned a victim of crippling over capacity, heavy debt and sliding prices alarm bells sounded among banks and regulators about the risk of lending to the industry. In June, after months of cajoling, banks were ordered to clamp down on new lending to steel traders.
Steel industry executives complain the banks went overboard.
Ms Xiao Zhicheng head of the Zhouning Chamber of Commerce that overlooks Shanghai steel trading industry interests said "Banks should consider the greater good and not just focus on protecting their own interests. Instead of pumping in more blood to save the patient, it's choosing to draw more blood."
In one Shanghai courtroom, steel trading firm boss Li tries to fend off a fed up lender. China Minsheng Bank, the country eighth biggest lender is trying to recover CNY 3 million of loans it made to the trading firm. When the bank recalled the loan in June, Mr Li tried to sell two Shanghai apartments she had used as collateral. In a flat property market, she came up empty-handed.
Her plea for more time to repay is one of more than 20 court cases Chinese banks have taken against steel traders. The targets tend to be mainly smaller trading firms with fewer than 50 employees, as the larger state-backed steel firms have more cash reserves.
These traders are mainly based in and around Shanghai a tight knit community drawn from Zhouning in the southern province of Fujian. At its peak in 2009, some 12,000 steel trading companies were scattered across the city accounting for close to 3% of Shanghai GDP. By some estimates, the number of steel traders has fallen by half as steel prices crumpled in the third quarter of 2011.
A loans official at a Shanghai branch of Bank of Communications, who asked not to be named because of the sensitivity of the subject said "The court cases you see are usually when things get desperate. We've had people go missing. Some have fled overseas while others just take on a new identity and move somewhere else."
The official said the owner of one of China biggest steel trading firms Yizhou Group skipped the country with his wife and children after piling up about CNY 1 billion in loans to banks including Bank of Communications.
In the Shanghai courtroom, lawyers for Minsheng Bank told Li after the hearing that banks were desperate to recall loans as they had heard of some borrowers going missing with tens of millions of yuan still owed.
Mr Li said recounting what she'd heard from a lawyer "One trader fled to Australia after borrowing CNY 23 million while others used their property as collateral to several banks at the same time. So banks are very cautious and taking immediate action against borrowers if they don't repay."
Another steel trader said banks promised fresh loans once existing loans had been repaid, but then withdrew credit lines. A Fujian trader surnamed Mr Xiao from a small Shanghai trading firm with just eight employees said "Some banks lied to us that they will give out new loans immediately after we repay the old ones, but they never really did. They just shut down the credit lines after they got the money back."
Some traders resorted to finding private lending at a much higher cost so they could pay back bank loans, in the hope of getting new loans from the banks leaving them mired in expensive debt when the banks pulled the plug.
Ms Xiao said "The banks have taken a tougher stance this year and not only required company assets to be used as collateral but also required the borrowers to use their own property as collateral."
For the banks, lending to steel traders was highly profitable while it lasted.
According to some in the industry four times the government-set lending rate, China Minsheng charged interest rates of up to 24% a year to small and medium-sized trading firms.
Bankers say the higher rates they charge are a direct response to the higher risk profile the steel traders carry, and not a single Minsheng loan to steel traders can be called a non-performing loan under China's four-tier classification system.
Mr Shi Jie assistant to Minsheng Bank's president said "The steel trading sector is a particularly high-risk sector. We've been very carefully controlling our risks there, and working with borrowers to come to a reasonable agreement if there are problems."
In China a loan is only classified as non-performing if it is overdue for more than 90 days and the borrower has missed interest payments. Otherwise, troubled loans can be classified under a different category known as special mention loans, or they can be called overdue.
Domestic steel prices rose by 25% in April to September 2009 before prices slumped. While the industry rode the price spike, bank loans offered a route to investing outside the industry.
The most common loan method was through a letter of credit, where banks paid for a trader's purchase and then gave the trader 3-12 months to repay. That allowed traders a window where they could sell the goods and use the proceeds to invest.
Executives say they couldn't refuse the money coming in and the cash did sometimes go into real estate or even 'shadow banking where they would take the loan and lend it to another party at a higher rate.
Source - Reuters
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