Sunday, June 5, 2011

What? Loans have to be repaid?

Some state-owned grain companies are grinding to a halt as the government's own policy bank tightens its lending standards. This illustrates the planned-economy role of banks as ATMs for state enterprises. If China's banks become real banks that make loans based on risk and repayment prospects, the remnants of the centrally-planned economy (still lumbering along on life-support from the "banks") will come crashing down.

The state grain-procurement bureaucracy was reformed/privatized during the last decade, but business as usual continued to a large extent for the state-owned grain companies. The key to the survival of these companies was a stream of cheap cash from the Agricultural Development Bank of China (ADBC). The bank now appears to be tightening credit standards.

An article from Guizhou Province reports that only four of the province's state-owned grain enterprises have gotten loans from the ADBC, and the loans are only 5% of what they "need." None of them have gotten loans from commercial banks.

The lack of funds is slowing the state-owned companies' purchase of summer-harvested grain. According to the article, this year Guizhou Province plans to purchase 32,350 mt of wheat, 34,800 mt of early rice, and 49,700 mt of rapeseed. At the end of May only 5000 mt of wheat, 350 mt of early rice, and 3220 mt of rapeseed had been purchased.

According to an official with the Guizhou Province grain bureau, the state-owned enterprises’ loan difficulty mainly is due to widespread historical account problems [unpaid loans] which eroded their credit standing with ADBC. Generally, commercial banks charge higher interest rates and the procedures for applying for loans are difficult, and approval is not so easily obtained. Policy-style grain purchase loans have a relatively low interest rate, so the enthusiasm for this business is not high. Some state-owned enterprises are restructuring their business and have not obtained funding.

The ten state-owned grain enterprises in Gansu Province's Baiyin City also reported difficulties getting loans in December 2010. They said they needed 70 million yuan to buy about 28,000 metric tons of grain each year, but they could only get 47 million yuan.

In Baiyin, the ADBC's policy changed and it became difficult to obtain loans; some enterprises hadn't gotten any loans at all. In two counties the grain enterprises had restructured, creating new companies that hadn't gotten any loans. In another county, the ADBC branch had decided that old unpaid loans had to be repaid before new ones could be given; it has essentially stopped lending in this county. In another county the ADBC requires the state-owned grain enterprises to supplement ADBC loans with funds of its own; in this county "the grain enterprises' loan difficulties are big." The Baijin district-level grain reserve company's loan application was still undergoing risk assessment, but the city-level reserve had already gotten 8.26 million yuan to increase the reserve by 3500 mt.

This has something to do with the ADBC's new rule that clarifies the boundary between policy-type loans for purchasing grain and commercial-style working capital loans. Normal grain purchase business is to be supported with commercial-type working capital loans. If more funds are needed, policy-type loans may be given. How this works is not clear, but an official at an ADBC branch in Henan said, "Commercial-type loans must be fully collateralized and the assessment is strict; loans for purchasing [grain] have loose requirements." A new regulation on working capital issued by the China Bank Regulatory Commission appears to be the driving force behind this.

This slow-down of grain-buying is not happening everywhere. Reports on the wheat harvest report that enterprises are purchasing the newly harvested wheat 24 hours around the clock. There seem to be funds to carry out the decree that local grain reserves be expanded.

While the tighter lending environment in Guizhou has reduced purchases by state-owned enterprises, private companies are still buying grain. The Guizhou grain bureau official said that nearly all the grain and oilseeds coming on the market in Guiyang were supplied by private companies; little was being sold by state-owned companies. No mention of where the private companies got their funds to do business. The official says grain reserves are plentiful so he reassures us there should be no effect on grain prices.

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