May 26, 2017 06:37 PM

New Debt Relief in Rust Belt Signals State Company Distress

(Beijing) — Troubled state-owned enterprises in China’s rust belt have found a friend in the nation’s banking regulator, which is giving local banks a new way to roll over loans and relax repayment terms.

Major companies winning support in recent months include northeast Heilongjiang province’s biggest steel producer, Jianlong Group, and its largest coal miner, Heilongjiang Longmay Mining Holding Group, according to Bao Zuming, who heads the provincial branch of the China Banking Regulatory Commission (CBRC).

Speaking at a regular press conference Thursday, Bao said the regulator had helped local state-owned enterprises (SOEs) resolve debt problems by “innovatively” applying a policy that encourages banks to postpone maturing debt collections and roll debts into new loans without paying the original loan's principle.

Corporate debt rollovers in China typically require that a borrower pay off the principle on the original bank loan with funds borrowed from another bank.

When the CBRC implemented the policy nationwide in 2014, the goal was to help struggling small and family-owned businesses obtain low-cost, short-term bank loans — not relieve indebted SOEs. Small businesses could turn to banks rather than high-interest-rate lenders when in need of short-term liquidity support, according to officials.

Bao’s announcement was an unusually frank acknowledgment of official support for big SOEs and served as another signal that severe corporate debt problems are pressuring northeast China’s industrial economy.

Like Heilongjiang, neighboring rust belt provinces Jilin and Liaoning are also struggling due to a traditional dependency on heavy industry and state-owned companies.

Liaoning-based Dongbei Special Steel Group Co. Ltd., China’s largest specialty steel producer, was driven into bankruptcy last year after the company defaulted on 3.6 billion yuan in debt.

Dongbei Special Steel investors who got burned had previously called for a boycott of all bonds issued by local governments and regional companies. The provincial government intervened to resolve the crisis but, according to creditors, ignored their demands.

To support indebted companies in Heilongjiang, Bao told reporters, the CBRC had overseen the creation of debt committees at 155 provincial SOEs. The committees, whose members include company executives and representatives from creditor banks, have been charged with helping companies overcome debt and short-term liquidity problems.

Debt committees can decide which companies out of the pool of 155 qualify for benefits through the CBRC’s extended application of the small-business debt policy.

The policy applies to “only companies that the debt committees think are worth saving (and) that are facing liquidity problems now but may recover soon enough,” Bao said.

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