Chinese companies with idle cash on their books are keener to lend money out at premium rates rather than invest it in their businesses.
Beijing’s anti-inflation measures may have slowed business momentum in industries ranging from property to manufacturing, but they have opened up an opportunity for cash-rich state-owned enterprises as hundreds of thousands of small firms are turning to high-yielding private loans for survival.
In the first eight months of this year, 40 listed companies lent a combined 8 billion yuan ($1.25 billion) to cash-strapped firms while 22 listed companies borrowed 12 billion from their state parents, according to stock exchange filings and numbers from data provider Wind Information Inc. The highest interest rate on the transactions reached 24.5%, nearly four times the one-year benchmark lending rate.
More tellingly, central bank data show that while the new yuan loans issued by banks fell 10% year-on-year to 4.17 trillion yuan in the first half of 2011, the amount of new borrowing between companies more than doubled year-on-year to 702.8 billion yuan.
One of the most impressive examples of a company choosing to lend out is cash is Tsingtao Brewery Co., which became China’s first dual-listed state-owned company and the first Chinese state-owned company to list on the Hong Kong Stock Exchange after raising roughly 1 billion yuan through IPOs in Shanghai and Hong Kong in 1993. Within two years of those offerings, the beer maker had loaned out nearly all of the money, which was supposed to have been spent on expanding its breweries.
Currently, ‘around 90% of China’s small and medium-sized enterprises rely on the private financing system, making it very popular,’ the official Xinhua News Agency recently quoted Gu Shengzu, a senior member of China’s parliament as saying.
In some areas, interest rates on private financing markets have risen to 120% on an annualized basis, Gu said.