China's banks are set to be the biggest losers in the sweeping bailouts of the country's steel and coal industries.
Local governments hoping to save their steel mills and coal miners have announced restructuring plans - with banks taking the hit - by improving the terms of loans or swapping them for bonds or equity in the struggling groups.
The reliance on banks comes as they are mired in bad debt - Rmb15tn ($US2.25tn) - 19 per cent of total commercial lending. Banks' profit growth has fallen over the past two years and could get worse as industrial players renege on loans for better state-brokered deals.
"With the finances of local governments being weak, the China Banking Regulatory Commission has been ordering Chinese banks to 'rescue' these companies, and we believe that banks are likely to suffer," Chua Han Teng, a senior analyst at Fitch Group's BMI Research, said in a report. "Not only do banks have to restructure the debt at the discretion of the government, these banks also purchase the bonds issued by these poor-performing companies."
China's State Council outlined in February that it would cut 500m tonnes of annual coal output over the next three to five years and 100m-150m tonnes of steel output over the next five years.
Progress, however, has been stunted. Two of the country's top industry regulators said recently that steel mills had hit just 47 per cent of the cutback target for the year by the end of July, while coal miners had achieved only 38 per cent.
The cutbacks to production have led to government-brokered bailouts.
Bohai Steel is reported to be in talks with local government on restructuring $29bn in bank and trust loans.
"I suspect there will be a haircut on the debt and also a debt-for-equity swap," Christopher Lee, an analyst at S&P Global, said of that plan.
"There's no way for the banks to not take a hit here. There's no going back to the good old days when growth was 8-10 per cent."
This month, the government of Shanxi , China's most coal-dependent province, said it planned to extend the maturity on up to Rmb400bn in loans to the region's seven biggest coal groups.
Source : afr.com