China launches 'triangle debt' probe

Problem said to be most serious in industrial, manufacturing sectors

The State Council has ordered a major probe into the level of debt owed between companies from the private and public sector.

It has now instructed some ministries to see how widespread the problem is, and to find out what risks it poses to the economy as it continues to slow, according to a senior official at the China Banking Regulatory Commission.

When a default occurs between one party and another because a third party can't or won't pay, it is often known as a "triangle debt".

Senior industry experts said they consider a growing problem does exist, particularly in the under-pressure industrial and manufacturing sectors, where many companies are suffering falling levels of business.

The CBRC source said various ministries are involved in the investigation, and will have to submit reports to the State Council.

They include the National Development and Reform Commission, the central bank, the State-owned Assets Supervision and Administration Commission, the Ministry of Industry and Information Technology, and the Ministry of Commerce

The Beijing-based Economic Information Daily reported on Friday that the State Council's attention was drawn to the potential problem by a report written by its think tank, which noted that companies were facing rising difficulties in collecting loan repayments, and that the incidence and levels had been rising steadily.

It said from January to May, the turnover rate of receivables among State-owned enterprises stood at 4.9 times, 0.32 times lower than the same period of last year.

Equipment manufacturers had suffered most in terms of payment defaults with both receivables and payables increasing "substantially".

Iron and steel enterprises, and equipment manufacturers have also witnessed rising payment defaults, and they had begun to default to their upstream customers.

"The potential crisis of 'triangle debt' has started to spread upstream," said the report.

In the 1980s and early 1990s, China found itself trapped in a triangle debt crisis, until then Vice-Premier Zhu Rongji started to clean-up the tangled web of debt in June 1991, by injecting more than 50 billion yuan ($7.87 billion) into a number of fixed-asset investment projects, so to kick-start corporate finances.

Liu Yuhui, director of the financial lab at the Chinese Academy of Social Sciences, said: "Apparently a wide range of debt restructuring cannot be avoided. This time, the debt issue has prevailed across all areas of the economy. Adding long-term use of allied borrowing - which means a group of companies make guarantees to each other when applying for loans together - can lead to very high systemic risk," Liu said.

Diao Li, director of the economic operation department of the China Iron and Steel Association, also said he was aware of a growing crisis.

"This round of triangle debts was mainly created between State-owned industrial companies. It has seriously affected the steel industry, but the coal industry is suffering even more."

According to data from his association, in the first seven months of the year, receivables among major iron and steel companies reached 116 billion yuan, up by 20 percent year-on-year.

A source at the China Nonferrous Metal Industry Association said the issue is still small in that industry, with most of the risk being experienced at a local level.

Among 1,437 listed companies that had published half-year results as of Thursday, receivables stood at 803.9 billion yuan by the end of June, up by 45 percent year-on-year.

By March, receivables among industrial enterprises rose by 18 percent year-on-year to 7.12 trillion yuan, accounting for 12.5 percent of outstanding loans, the highest level since 2009, the newspaper reported.

Increasingly tough economic conditions have also driven up reported bank defaults.

Non-performing loans among banks increased for a third straight quarter to 456.4 billion yuan by June, the longest deterioration in eight years, according to CBRC figures released last week.

Analysts are now forecasting increased levels of bad debt, if the economy continues to soften.

In addition, they are predicting slower increases in new lending, caused by weaker loan demand, which will hamper efforts by banks to counter rising bad loan levels.

Li Lihui, president of Bank of China Ltd, said on Friday that its new yuan lending this year will be lower or almost the same as last year.