Saturday, May 31, 2014

Chinese-style banking proves unfriendly to small firms

Debate regarding the role of the financial system in supporting China's real economy has come up time after time, as the country faces a challenging outlook because of the ongoing transformation of its industries, the Shanghai-based National Business Daily reports.

During a recent visit to Inner Mongolia, Premier Li Keqiang said that policy tools should be adopted to help small and micro businesses, which are finding it difficult and expensive to secure funds during tough economic times.

However, the unique practices in China's banking sector are part of the problems hindering business and investments, especially foreign companies being unfamiliar with the "Chinese way of financing," the paper said.

A project of AusCircuit Electronics, a Chinese-foreign joint venture, in northern China's Tianjin municipality is one example that aptly reflects the impact of Chinese banking practices on businesses. Approved by Tianjin authorities in 2005, the company had planned to build the country's largest flexible printed circuit factory, which was scheduled to enter service in 2008.

However, the stalled construction of the factory ran into subsequent legal disputes between the company and its contract constructor, which delayed the project, with equipment imported for production remaining idle on site, the paper said.

The delay also made it difficult to repay the 32 million yuan (US$5.1 million) in loans, which were set to mature in two and three years at the time. To solve the dilemma facing the company in terms of repayment, the bank proposed a solution in 2010, modifying the original loan agreements to offer a new line of credit worth 80 million yuan (US$12.8 million).

The arrangement actually benefited the bank, since the bank required the company to make a deposit of 40 million (US$6.4 million) beforehand, meaning the company only received credit of 40 million yuan (US$6.4 million). Moreover, the bank had released the funds in the form of acceptance bills with a term of six months, further tightening the cash flow of the company.

Company executive Cai Guoxiong told the paper that the bank should not have released funds in this way or demanded repayment in such a short time period since the situation would force a borrower to turn to loan sharks, who charged a rate of 0.3% per day.

This series of events have led to the current scenario facing the company, which now has poor credit because of defaulting on an earlier loan repayment and of the project's stalled progress, the paper said.

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