5 April 2017
PBOC Issues Credit Policy Guidelines for 2017
The General Office of the People’s Bank of China (PBOC) recently issued an urgent document saying that it will continue to provide credit support to leading backbone enterprises with marketability and competitiveness in spite of temporary problems in industries with excess capacity, such as steel and coal.
This document, titled Opinions of the PBOC General Office on Doing A Good Job on Credit Policy Work in 2017 (Yin Ban Fa No. 48 ), represents the continuation of the policy of further differential adjustment for the resolution of excess capacity since China reactivated the debt-for-equity swaps in 2016.
However, some coal enterprises are using falling output as a result of the reduction of excess capacity as an excuse to ask for higher prices. For example, in an ultimatum sent to major power plants in the region on 20 March, the Shenhua Ningxia Coal Industry Group had this to say: “The contract price for the first quarter of 2017 will continue to apply in the second quarter, that is, RMB320 per ton for 4,500 kcal coal. Please sign your contracts before 29 March. Otherwise the supply of resources cannot be arranged after 1 April.”
Seven of China’s largest electricity companies, including the Ningxia subdivision of the China Huaneng Group, Aluminum Corp of China, Beijing Jingneng Clean Energy Co Ltd, Shenergy Co Ltd, China Guodian Corp, China Huadian Corp and China Datang Corp, jointly submitted a proposal to the Economic and Information Commission of the Ningxia Autonomous Region on 17 March, saying that “the Shenhua Ningxia Coal Industry Group had successively increased its coal price from RMB200 to RMB320 since 2016, which triggered the disorderly escalation of coal price in the peripheral markets in the region”. All thermal power plants in the region are now running at a loss as a result of this.
Document No. 48 pointed out the need to positively strengthen financing support to enterprises with excess capacity in merger and re-organisation, transformation and upgrade, optimisation and international co-operation on production capacity provided that risks can be controlled.
Financial institutions and the capital market both see this as a win-win move. First, it provides a clearer source of funds for coal enterprises that might want to carry out merger or re-organisation, transformation and upgrade, optimisation and even seek multiple loans in future. Second, it provides policy guarantee for commercial banks, especially local commercial banks, in providing financing support to enterprises supported by the local authorities.
Many banks stopped granting new loans to the steel and coal industry under the pressure of mounting outcry to cut excess capacity in 2016. Worse still, there were even cases where loans were reduced or rescinded, or repayment was demanded outright.
The Opinions on Supporting the Steel and Coal Industries in the Resolution of Excess Capacity to Achieve A Turnaround jointly issued by the People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission in 2016 (see details in Chinese) underpinned the importance of financial control in reducing excess capacity. The following four control measures were put forward at that time: Strictly control credit input to production capacity increased in violation of provisions; credit support shall not be provided to projects to increase production capacity in the steel and coal industries for which approval has not been obtained; lending to these enterprises shall be stopped; and relevant loans to enterprises and backward production capacity that have sustained losses for a long period of time, have become insolvent or have lost their market competitiveness shall be resolutely reduced or cancelled.