Doug
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Financial Times - February 8 1999
CHINA: Foreign banks get tough By James Harding in Shanghai
Several foreign banks are taking more aggressive steps to recover money from Chinese borrowers, such as calling in loans and demanding accelerated debt repayments.
The tougher measures underline the deterioration of international bankers' confidence in corporate China and also suggest a tightening credit squeeze is set to put further strain on many Chinese companies.
Zhou Haiming, a lawyer in Shanghai, says: "The acceleration of debt repayments is a very bad signal. . . There is a sense of doubt among foreign lenders about the ability of Chinese borrowers to repay."
Many banks, fearing that additional pressures on Chinese borrowers could cause a serious repayment crisis, are taking a more accommodating approach by renegotiating payment schedules.
But a number of overseas financial institutions have begun to take more assertive action. In a few cases, where banks have a demand facility on their loans to Chinese borrowers, they have called in their loans, bankers and lawyers in Shanghai say. "The banks are being quite careful. They do not want to create a crisis," says one person involved in an attempt to recover the interest and principal from a Chinese borrower. "But, in certain circumstances, where there is a demand facility, people are activating it."
In other cases, bankers find grounds to demand accelerated debt repayments. "People are trying to get their money back," says one foreign executive in Shanghai, suggesting banks are looking to find technical defaults by Chinese borrowers, which they would have ignored two years ago, in order to justify calls for accelerated payment.
Some lenders have also been seeking recourse to legal authorities. High Court writs published in Hong Kong recently show Ka Wah International Merchant Finance seeking to recover more than US$3m (£1.8m) from Zhanjiang International Trust and Investment Corporation, a Chinese local government-backed investment agency, as well as $9.6m from Nanhai Zhong Nan Power Machinery and other borrowers from the southern province of Guangdong. The parties involved either declined or were not available to comment.
Foreign bankers in Shanghai say they are generally reluctant to call in loans or demand acceleration, which could make matters worse for overseas Chinese borrowers already struggling in the face of a severe international credit squeeze.
International lenders have been cutting off credit to Chinese borrowers since the sudden closure last October of a prominent state-backed company - Guangdong International Trust and Investment Corporation (Gitic) - shook foreign confidence in corporate Chinese risk. Since then, international banks have mostly been refusing to roll over short-term working capital loans and declining to issue new loans to corporate Chinese borrowers.
Banking sentiment has sunk further this year, as hopes of repayment on Gitic's $4.37bn outstanding debts have dimmed following the Chinese authorities' decision to put the company into liquidation and disregard previous pledges to repay registered foreign creditors.
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Wall Street Journal - February 8, 1999
Wary Foreign Banks Pare China Exposure
By HENNY SENDER and CRAIG S. SMITH Staff Reporters of THE WALL STREET JOURNAL
BEIJING -- Foreign banks have accelerated their retreat from China, in some cases asking for repayment on loans before they are due, fearing rising defaults as the country's economic growth slows.
While many international banks insist there has been no change to their China lending policies following debt defaults by several government-owned financial institutions, most are carefully reviewing outstanding loans to the country and proceeding more cautiously with new loans. Japanese, Korean and Hong Kong banks, in particular, are paring business -- even looking for excuses to call in loans not yet due. "No bank can say what is safe," says a Tokyo-based banker.
Still, just because banks are asking for early repayment, that doesn't mean borrowers are responding. In fact, under stricter foreign-exchange controls implemented last year to slow growing capital flight, Chinese borrowers must get central-government approval to repay a loan early. And few foreign-bank loans in China include clauses that allow banks simply to demand repayment before the loans are due, a common practice elsewhere.
Gitic's Closure Accelerates Cuts
Lending to China was drying up even before Beijing closed the country's second-largest trust company, Guangdong International Trust & Investment Co., or Gitic, in early October: New foreign loans plummeted 51% in the first nine months of 1998 compared with the year-earlier period. But Beijing's decision to send Gitic to bankruptcy court rather than indemnify foreign lenders has accelerated the cutback in lending. Bankers fear more defaults as China's economic growth slows to 7% this year from 7.8% growth in 1998.
The concerns are mirrored in stock and bond markets. At least one international Chinese bond offering has been postponed due to the deteriorating sentiment. And Chinese power producer Shandong International Power Development Co. took the unusual step Friday of extending the closing date of a Hong Kong share offering to today from last Friday because of poor investor response. Two other Chinese stock offerings in Hong Kong were shelved for the same reason earlier this month.
Japanese banks accounted for the largest share of foreign bank lending to China in recent years; Some Japanese bankers say the volume of Japanese bank loans to China may be as much as five times greater than officially disclosed. Now, pressed by problems at home and growing uncertainties in China, Industrial Bank of Japan, Sanwa Bank and other major Japanese lenders say they are trimming their China exposure.
Some bankers say they are reviewing loans to questionable Chinese institutions, looking for technical reasons to declare loans in default so they can ask for their money back. Shanghai's mayor, Xu Kuangdi said earlier this month that one bank had requested early repayment on a $60 million loan to a city agency -- and the city complied. "Shanghai will do what it can to help banks meet their capital needs," said the mayor.
Just a Bluff?
Still, the strategy of calling in loans early is being used only at the margins. An official at China's State Administration of Foreign Exchange says there has been no significant increase in early repayment requests in recent months. Bankers stress that since most of the loans are bilateral, it's difficult to gauge the scope of requests for early repayment.
Some bankers suggest that some of the dire warnings and threats to cut funds for Chinese borrowers may partly be a bluff, designed by lenders to win better treatment of their claims in the Gitic case. There, some Japanese banks have as much as $100 million at risk, according to local media re ports in Japan.
The delicate negotiations over Gitic, meanwhile, are making for strange bedfellows. Japanese bankers say some of China's state-owned banks, worried that foreign banks will cut loans to them, have been arguing on behalf of foreign lenders with China's banking regulators.
Using legalistic measures to call in loans can be politically damaging for banks trying to build relationships and a positive corporate image here in hopes of benefiting when the country opens its domestic banking market to foreigners. But some foreign banks are calling in selected loans early, with little success. And many banks are refusing to refinance existing loans, asking instead for repayment when the loans come due. The banks are also making fewer new loans.
"If China isn't part of your core franchise, and you have no access to accurate information because you lack superior contacts, you are out," says the treasurer of one international bank in Hong Kong.
So far, a healthy trade surplus and foreign direct investment have supported China's balance-of-payments position, says Joan Zheng, China economist for J.P. Morgan & Co. in Hong Kong. But the outlook for both these sources of capital isn't robust either. "They are shut out of the capital markets," says the treasurer. "Direct investment is drying up. The economy is slowing. That will make banks pull out even faster."