* China targets capacity cuts in sectors such as steel, coal
* Liabilities for 6 such sectors 10 trln yuan in 2015 -UBS
* Coal and steel industry key to some local governments and
* Beijing wants banks to cut lending to overcapacity sectors
* Local governments urging banks to keep lending
By Shu Zhang and Matthew Miller
BEIJING, July 15 China's provinces are pushing
back against Beijing's efforts to restrict credit to loss-making
enterprises with excess capacity, and are enlisting the support
of local bankers to keep financing the targeted sectors, such as
steel and coal.
As part of China's economic efficiency goals, the State
Council earlier this year set capacity reduction targets for
regional and central government enterprises in such sectors, and
China's banks have been ordered to slash lending to loss-making
and delinquent corporate borrowers.
But local governments in China's rust belt have been singing
from a different hymn sheet in documents and speeches urging
local lenders to keep funding firms central to the regional
In Shanxi province, China's top coal producing region, the
government told financial institutions to maintain coal sector
lending at least at last year's levels, increase awareness of
the industry's "pillar and strategic status" and not recall
loans to seven local government-owned coal groups, according to
a document released on the government's website in May.
Shanxi's deputy governor Wang Yixin told banks at an
industry event on Wednesday that it was in their mutual interest
to support the seven, which at the end of 2015 reported total
liabilities of more than 1 trillion yuan ($150 billion) and an
average liability-to-asset ratio of about 83 percent, according
to Reuters calculations.
"What Shanxi's good coal companies need the most right now
is the confidence of investors and the help from financial
institutions - as we cross the river on the same boat," Wang
said, and urged banks to roll over the companies' loans and buy
Three senior executives at China's top coal producers all
said they could secure loans at a rate equal to or lower than
the central bank's benchmark rate, suggesting banks were lending
a sympathetic ear to that call.
"In China, the most important thing is stability," said a
manager at the Shanxi branch of one of China's big four
state-owned asset management companies that help banks dispose
He said banks had nothing to fear in lending to such
state-owned companies and were not about to treat the coal
companies' debts as non-performing.
"Actually, some of those loans are already non-performing,
but banks can arrange new loans to repay old loans and
interest," he said.
In Henan the provincial government has asked local bankers
to help companies in coal, steel, metals and construction
materials to switch industry classification so they don't fall
into categories covered by lending restrictions set by banks'
headquarters, according to a document published on the Henan
government's website in May.
The document urged locally headquartered financial services
companies, including Zhongyuan Bank, Bank of Zhengzhou and rural
commercial banks, to demonstrate their support for local
Zhongyuan Bank and Bank of Zhengzhou didn't respond to
requests for comment.
At the end of June the Shandong government in eastern China
warned lenders in a document on its website that they would be
"denounced" or "sanctioned" by creditors' committees and China's
banking association if they unilaterally recalled loans to key
The China Banking Regulatory Commission (CBRC) did not
immediately respond to requests for comment.
Beijing has noticed the footdragging.
"Some regions' determination to remove over-capacity is
shaky," Xu Shaoshi, head of the National Development and Reform
Commission, China's top economic planning body, was quoted by
state media as saying last week.
"The practical problem is that some regions are under big
economic downward pressure and face difficult fiscal income and
employment situations," Xu said on a teleconference that aimed
to urge local leaders to cut over-capacity.
Total liabilities for six over-capacity sectors amounted to
10 trillion yuan in 2015, including 4.9 trillion yuan in bank
loans and 3.8 trillion yuan in shadow credit, according to UBS
China's banking regulator has given lenders some latitude to
manage their lending to over-capacity industries.
"It doesn't mean there will absolutely be no new loans to
the coal industry," an official from the CBRC said.
"Banks can decide for themselves from a risk management
perspective how to change their loan structure, after taking
into consideration the central government's policy and local
government arrangements," the official said.
That is proving a difficult balancing act.
Last Wednesday, Hebei province, home to a quarter of China's
steel manufacturing, renewed its pledge to meet steel and coal
reduction targets for 2016 following a central government
environmental inspection, according to a notice on the
Just two weeks earlier, provincial party secretary Zhao
Kezhi praised Yi Huiman, chairman of Industrial and Commercial
Bank Ltd , the country's biggest bank, for
"thinking from the big picture" by strengthening lending to the
heavily industrialised region, state media reported.
"Those outdated steel mills, local governments and local
banks are lingering in the last gasp," said Xu Zhongbo, head of
Beijing Metal Consulting, which advises Chinese steel mills,
adding that they were doing all they could to delay the capacity
"They live or die together," he said.
($1 = 6.6897 Chinese yuan renminbi)
(Reporting By Shu Zhang and Matthew Miller; Editing by Will