By John Richardson
THE credit crisis that is limiting chemicals and polymer trade in China is continuing, even though local initiatives have been launched to help small and medium-sized enterprise (SMEs) with the central government indicating that more help could be on the way.
As we have discussed before on the blog, the trade finance crisis affecting the SMEs is a major reason why chemicals sales have fallen quite dramatically in China during 2011. In products such as polyethylene (PE) producers are now even talking about flat or negative growth in demand for this year.
Beijing is set to ease lending restrictions on the SMEs over the next few weeks,according to the Hong Kong Standard newspaper.
And in Zhejiang province, Rmb40bn of additional loans to these hard-pressed companies have already been issued online.
Shanghai city authorities have launched a lending scheme for SMEs, according to Bloomberg, as the economic damage to a critically important part of the Chinese economy becomes more apparent. It is estimated that private companies in general generate 80 per cent of the country’s employment and more than 50 per cent of economic output.
The 2008 economic stimulus package made the credit clampdown necessary because of all the excess liquidity still flowing around the financial system.
Those who have made money from the economic stimulus – real-estate speculators, mining companies etc – are taking advantage of the plight of the SMEs by setting up private lenders and credit guarantor companies (both functions are often performed by the same company).
How this works is that fees are charged to the SMEs for obtaining loans from banks (usually 0.5-1 per cent of the value of a loan annually), according to this article from the Wall Street Journal.
Guarantors will also require machinery or other physical assets to be used as collateral against loan default.
And when these private companies provide lending themselves, interest rates can be as high as 30 per cent – in excess of four times the official lending rates from the state-owned banks.
The private lenders – which are categorised in China as non-bank institutions – issued Rmb287.5bn of loans in June this compared with Rmb124.9bn a year earlier, according to government data.
So successful have these lenders become that some are listed on the Shanghai stock exchange.
Despite of efforts to relieve the plight of the SMEs, there is no great confidence in chemicals markets that the lending situation will greatly improve during the rest of this year.
“We were all taken a bit by surprise by the August inflation number at 6.2% – we had expected it to fall to 5.9 %. It looks as if underlying inflationary pressure is stronger than we expected,” a senior executive with a global polymer producer told the blog earlier this week.
“And so we don’t expect any big positive changes in the liquidity situation in China during the remainder of 2011.
“Two big converters, who were also acting at traders, have recently gone bust in Guangdong with debts of Rmb100m each.
“The government has deliberately targeted the speculators that they blame for a lot of the unnecessary heat in the economy.
“The problem is that these speculators are also often converters – SMEs.”
As you can see, the irony is that by clamping down on financing to one set of speculators (the converters who double up as speculators), the government has encouraged the rapid growth in another speculative area of the economy: Private lending firms.