Shenzhen .International Trust & Investment Corporation (Szitic) is arguably among the best of China's beleaguered trust and investment companies. Capitalised at more than US$200m, strongly supported by the local municipal government, and holding a diversified portfolio of interests, Szitic last year achieved profits of about US$30m. However, in the wake of the collapse of Guangdong International Trust & Investment Corporation (Gitic), Szitic has found its overseas bank credit lines slashed and new lines of borrowing unavailable.
It is a galling state of affairs, says Szitic director Edward Luo, especially since Szitic last year repaid without difficulty US$132.5m in foreign debt and about US$40m in domestic borrowings. "In the current environment, foreign banks are just not lending to domestic companies," he complains. The same scenario is being played out in cities throughout the country, as a post-Gitic credit squeeze takes its toll on good and bad Mainland companies alike.
In recent weeks, bankers said government-backed window companies in Dalian and Fujian have been late in making principal and interest repayments on foreign borrowings. They join a group of Guangdong companies – led by Guangdong Enterprise (Holdings), Guangnan (Holdings) and Guangzhou International Trust & Investment Corporation (Gzitic) ?that have technically defaulted on overseas loans. Many more are believed to be in trouble with local banks. Repayment difficulties stem from a variety of causes, ranging from unsuccessful forays in the stock market and corruption, to the use of short-term borrowing to finance long-term investments. However, what is driving the current pace of default, bankers say, is a growing international credit freeze that is unlikely to thaw in the near future.
A typical example of how stricter foreign lending criteria is bringing many local companies to despair can be found at Shenzhen Special Economic Zone Development Finance. In mid' February this Shenzhen-backed company admitted to problems repaying about US$20m in short-term loans that fell due in January. The company's main business involves fund-raising and consultancy on behalf of its parent, a wholly-owned subsidiary of the Shenzhen municipal government's Shenzhen Investment Holdings. The company is also understood to be heavily invested in the local property market.
According to overseas bankers, Shenzhen Development Finance was hard hit by cash-flow problems when at the end of last year foreign banks simultaneously pulled or called back their lines of credit. "It's really understandable," explains one Shenzhen-based Hong Kong banker. "Any company facing similar bank line withdrawals would have problems." Liquidity problems were heightened, a local company official added, by Shenzhen Development Finance's inability to collect on several of its own loans.
Shenzhen Development Finance and the banks are now optimistic a deal can be brokered that will see at least interest payments on outstanding lending resume within the coming weeks. However, everyone agrees the negative credit environment is likely to remain for the foreseeable future. "It is quite obviously a ramification of Gitic," says a Shenzhen-based European banker.
An end to cronyism
What overseas bankers are worried about is their ability to collect outstanding debts. Beijing's decision to allow Gitic to go bust and its weak commitment to repay its foreign borrowings has meant old assumptions of doing business in the Mainland no longer apply. The days of foreign banks lining up to lend to provincial and city-backed companies, accepting comfort letters in lieu of detailed balance sheets, are obviously over. With China's central bank withholding the approvals that would allow local governments to repay foreign debts accrued by their window companies, comfort letters offer no comfort whatsoever. Even debt registered with the State Administration of Foreign Exchange appears unlikely to receive any form of preferential treatment by the central government.
Beijing, instead, has decided to cold shoulder crony business practices, leaning upon a Darwinian approach to restructuring its debt-laden non-banking financial institutions. That was articulated by Lu Botao, Guangdong High People's Court president, who in declaring Gitic bankrupt said the move conformed to the "principles of a market economy." Guangdong Executive Vice Governor Wang Qishan insisted that Mainland government and business operations were to be separated, musing the historic mission of China's window companies had come to an end.
What that means for overseas banks trying to collect debt from government-backed firms is anybody's guess, but foreign bankers are desperate to minimise their current risks. Feeding their fears is a belief that wholesale asset-stripping has begun, as local companies move to collect partial repayment or receive compensation for outstanding borrowing to debt-struck firms. They point to a February decision by Shanghai Industrial Investment (Holdings) to sue the Hong Kong investment arm of the Fuzhou municipal government for repayment of US$2.35m. That move coincided with an order by the Anhui High People's Court that Gzitic hand over its stake in Guangzhou Securities to settle part of a Yn48m debt owed to Anhui International Trust & Investment Corp. Earlier in the year, Luoyang Glass and Guangzhou Ship-yard also took possession of Gzitic properties in lieu of repayment of outstanding lending.
"We have to do something," a Guangzhou-based banker says. "If we don't do anything we could be in a more awkward situation. This asset depletion could go on for a very long time." The atmosphere has grown so poisoned, foreign bankers are now openly discussing hauling Mainland firms to bankruptcy court rather than debt restructuring meetings.
Scramble for funds
At Szitic, meanwhile, company officials are scrambling to come up with funds to help repay foreign debts coming due this year. According to Ms Chen Wei, Szitic's finance department manager, the company's inability to borrow offshore has forced it to shrink expansion plans and accelerate debt collections. "We will be able to pay back all of our debts on time," Chen insists. To do so, however, Szitic wants to minimise the withdrawal of foreign lending by strengthening relation-ships with domestic financial institutions.
Other Mainland non-banking financial institutions are hoping to do the same thing. In February, PBOC Guangzhou branch president Jiang Chaoliang warned local banks to keep plenty of cash on hand to guard against payment problems in the wake of Gitic's bankruptcy. Clearly, as the prospect of an escalating series of Mainland company defaults and liquidations grows more likely, caution has become the watchword of the day.