Insight: China's steel traders expose banks' bad debts

Sun Sep 2, 2012 6:00pm EDT
 
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By Ruby Lian and Kelvin Soh

SHANGHAI/HONG KONG (Reuters) - China's banks are coming after the country's steel traders, hauling executives into court to chase down loans that some traders said they didn't initially need and can't now repay.

The heavy push to recover the loans is another sign of strain on China's financial system at a time when the country's leaders are contemplating another round of stimulus to boost the economy, and when banks are worried about bad debts piling up.

The battle between the banks and steel traders also exposes flaws in the 4 trillion ($629 billion) stimulus round in 2008, and offers a warning to those calling for pumping more money into the system. At that time, Chinese banks threw money at the steel trade - a crucial cog in supplying the country's massive construction and infrastructure growth.

But those steel loans, after offering a quick fix, became excessive, poorly managed, or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy, and they had to put the money to work in real estate and the stock market.

"After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn't need," Li Huanhan, the owner of Shanghai Shunze Steel Trading, told a judge at a recent hearing. "We had nothing to do with the money, so we turned to other investments, like real estate."

PLUSH APARTMENTS

While some loans did go towards equipment and expansion, executives admit money was also used for pet property projects, plush apartments and stock market bets.

By the end of last year, China's steel industry had a total debt burden of $400 billion - around the size of South Africa's economy. Some of China's leading mills alone owe 200-300 billion yuan ($32-$47 billion), according to the China Iron and Steel Association.   Continued...

 
An employee checks on a steel product at a steel production factory in Wuhan, Hubei province in this August 2, 2012 file photo. China's banks are coming after the country's steel traders, hauling executives into court to chase down loans that some traders said they didn't initially need and can't now repay. The heavy push to recover the loans is another sign of strain on China's financial system at a time when the country's leaders are contemplating another round of stimulus to boost the economy, and when banks are worried about bad debts piling up. REUTERS/Stringer/Files