When the going gets tough in China, just get a bank. China is desperate to solve several problems it has due to its debt-to-GDP ratio being north of 300 percent. It may have found a pretty unconventional one by letting companies become banks, according to a report by the Wall Street Journal.
With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sany plans to join forces with a pharmaceutical company and an aluminum company.
In recent months several city commercial banks in China have been taken over by the likes of tobacco and travel companies, recapitalized and renamed. Banking licenses are scarce in China, and rarely are new banks set up from scratch. Sany’s Sanxiang Bank will be up and running in six months.
It will go up against crosstown rival Bank of Changsha, which at the end of last year had substantial 90 billion yuan book of off-balance-sheet loans, more than a quarter of them nonperforming. Sany had better ramp up quickly.
One problem is that companies are defaulting on bond payments, and there is no adequate resolution mechanism for bad debts, at least according to Goldman Sachs.
“A clearer debt resolution process (for example, how debt restructuring on public bonds can be achieved, how valuation and recovery on defaulted bonds are arrived at, the timely disclosure of information and clarity on court-sanctioned processes) would help to pave the way for more defaults, which in our view are needed if policymakers are to deliver on structural reforms,” the investment bank writes in a note.
By becoming or owning banks, the companies can just shift debt around different balance sheets to avoid a default, although this is probably not the resolution Goldman Sachs had in mind when talking about structural reforms.
By ANJANI TRIVEDI with help from Valentin Schmid
