China banks could see bad loans rise in 2013-industry body

BEIJING (Reuters): Bad loans at Chinese banks could rise by between 70 billion yuan and 100 billion yuan ($11 billion and $16 billion) in 2013 due in part to delinquency risks from industries plagued by overcapacity, the China Banking Association said in an annual report on the industry.

The report comes several days after Beijing began a new campaign to reduce overcapacity in several industries, a step seen as key to eventually rebalancing China's economic structure. It warned that steel, photovoltaic and shipping sectors may be at the forefront of a new crop of bad loans.

"Such industries facing excessive capacity could lift non-performing loans and require highest attention from banks in their short-term risk control," the industry body said in the report, published on its website late on Tuesday.

Remedying overcapacity could bring some pain to banks, who have historically focused their lending on such sectors.

Total bad loans stood at 526.5 billion yuan at the end of Q1, slightly up from the 492.9 billion yuan at the end of 2012, according to separate figures from the banking regulator.

Earlier this month China's central bank removed controls on bank lending rates, giving banks the freedom to compete for borrowers. Many economists say this will help banks to learn to better price risk and force them to allocate capital more efficiently.

Bank lending is a focal point in China's monetary policy as it is controlled by the ruling Communist Party as a way to manage economic growth and inflation. The government tells banks how much to lend, to who and when.

The association's report said the ratio of non-performing loans to total lending will largely remain at the similar level with 2012, due to a rise in overall lending.

The average bad loan ratio in China's banking system was 0.96 percent at the end of the first quarter of 2013, up slightly from 0.95 percent at the end of 2012.

The report also said that what happens to lending to the property sector and local government financing vehicles will be key to determining the banking sector's long-term asset quality, though it did not elaborate.

Concerns have been raised about the potential for systemic risk from piles of debts collected by local governments and from a possible property bubble, prompting the central government to order a nationwide audit of local debt.

The report also said that shrinking net interest margins and a slowing development of fee-based businesses will dampen profit growth for banks in 2013, but also flagged optimistic signs, noting that China's urbanisation drive and efforts to expand domestic consumption will mean business opportunities.

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China to audit local authorities and state enterprises over debt fears

It is suspected that Chinese state enterprises have used cheap loans to increase production. Photograph: Zhang Haiyan/Xinhua Press/Corbis

China's local authorities and state enterprises will come under scrutiny in the coming months after the government said it planned to audit their debts.

In a one sentence announcement on its website, the National Audit Office (NAO) said it planned to embark on a nationwide assessment of borrowing by public bodies, underlining fears that thousands of local councils and state-owned businesses in the world's second biggest economy have over-stretched themselves and are close to collapse.

The NAO said other audit projects would be frozen to complete the task, but failed to give a publication date.

Some analysts believe China's myriad local and state enterprises, many of which have borrowed heavily to invest in property, new factories and machinery over two decades of rapid economic expansion, have racked up debts of about $3tn (£2tn).

There is a suspicion that companies, especially in the heavy industrial sector and commercial property industry, have used cheap loans to increase production and pay higher wages rather than assess the long-term viability of their businesses.

Local governments, which are prevented from taking on debt directly, but have borrowed heavily through special-purpose vehicles, have frequently borrowed from companies in private arrangements at high cost, with the money often used in speculative real-estate projects.

Much of the lending is also believed to be directed to businesses that pay the highest bribes, undermining standard credit controls.

Last year a new communist party leadership took control in Beijing promising to crackdown on corruption and graft.

A slowdown in output over the past six months has been blamed on tackling corruption alongside a greater emphasis away from investment towards domestic consumption.

A local government buckling under the weight of its own debt is a troubling scenario for the leadership, and one that Deutsche Bank has said could potentially pose a systemic and macroeconomic risk to the country.

Standard Chartered, Fitch and Credit Suisse have estimated local government debt in China at the equivalent of anywhere between 15% and 36% of the country's output, or as much as $3tn based on World Bank GDP figures for 2012.

Chinese economists point out that the state has access to $3.5tn of foreign reserves built up in the boom times, which can be used to bail out failing enterprises or for investment in areas that ministers believe will create economic benefit.

Justin Lin, a former World Bank chief economist and senior adviser to the Chinese government, said at a conference in London last month that, while it was possible for Beijing to push through structural reforms too quickly and stymie growth, it was an unlikely outcome.

He predicted the economy would grow between 7.5% 8% for the next 20 years at least as domestic consumption on areas like health increase dramatically.

"China is a developing country and there is still so much scope for investment," he said.

Lin, a professor at Peking University, said China would cope with a rapidly ageing population and higher wage costs by turning to neighbouring countries, which act like subsidiaries with large pools of young labour.

"As long as it is made politically palatable in these countries for them to behave almost as client states, they can all benefit. Then there is the ability to increase the retirement age from the current 60 for men and 55 for women. Also the quality of the labour force can increase to offset the relative decline in the number of young people coming into it."

Vice-finance minister Zhu Guangyao said earlier this month that the government did not know precisely how much debt local governments had built up.

The audit office warned in a June report that debt levels among local governments are rising and the financial burdens and risks are not being properly managed. It put total debt of a sample of 36 local governments at 3.85tn yuan (£409bn) at the end of 2012.

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EU, China resolve solar dispute - their biggest trade row by far

Workers install a solar panel in Jiuquan, Gansu province, July 14, 2013.

Credit: Reuters/Stringer

By Robin Emmott and Ben Blanchard

BRUSSELS/BEIJING | Sat Jul 27, 2013 8:26am EDT

BRUSSELS/BEIJING (Reuters) - China and the European Union defused their biggest trade dispute by far on Saturday with a deal to regulate Chinese solar panel imports and avoid a wider war in goods from wine to steel.

After six weeks of talks, the EU's trade chief and his Chinese counterpart sealed the deal over the telephone, setting a minimum price for panels from China near spot market prices.

European solar panel makers accuse China of benefitting from huge state subsidies, allowing them to dump about 21 billion euros ($28 billion) worth of below-cost solar panels in Europe last year, putting European firms out of business.

Other European industries that have accused China of dumping have faced imports of about 1 billion euros a year.

Europe planned to impose hefty tariffs from August 6 but, wary of offending China's leaders and losing business in the world's No. 2 economy, a majority of EU governments - led by Germany - opposed the plan, which led to the compromise deal.

"We found an amicable solution," EU Trade Commissioner Karel De Gucht said. "I am satisfied with the offer of a price undertaking submitted by China's solar panel exporters," he said, referring to the minimum price for China's imports.

Chinese Commerce Ministry Spokesman Shen Danyang welcomed the deal, hailing a "positive and highly constructive outcome".

An EU diplomatic source said that in the solar agreement, the agreed price was 0.56 euro cents per watt, near the spot price for Chinese solar panels in July in Europe, according to solar exchange pvXchange.

Under the terms of the deal, China will also be allowed to meet about half Europe's solar panel demand, if taken at last year's levels. EU consumption was about 15 gigawatts in 2012, and China will be able to provide 7 gigawatts without being subject to tariffs under the deal, the EU source said.

COURT CHALLENGE

That did not satisfy some EU solar manufacturers who said the minimum import price agreed still constitutes dumping and accused the European Commission of breaking EU law by failing to protect European industry.

European solar panel manufacturer association EU ProSun said it will go to the European Court of Justice in Luxembourg to challenge the deal.

"Even the biggest EU trade conflict ever must still be resolved on the basis of the applicable law," said EU ProSun's president, Milan Nitzschke.

However, China has sold solar panels for as little as 0.38 cents a watt, according to the European Commission, which handles trade issues for EU states, and tariffs would also hurt EU panel installers, who benefit from cheaper Chinese panels.

Chinese manufacturers such as U.S.-listed Trina Solar (TSL.N), Yingli Green Energy (YGE.N) and Suntech Power Holdings (STP.N) are among those exporting to Europe.

Chinese solar panel production quadrupled between 2009 and 2011 to more than the world's entire demand as it took advantage of a growing market for renewable energy in the face of concerns about climate change.

But the global financial crisis and ensuing euro zone crisis have forced European governments to withdraw generous subsidies for solar energy. That, along with Chinese imports pushing down prices, have sent many European solar companies into bankruptcy.

German group Conergy (CGYGk.DE) filed for insolvency this month.

Still, those concerns have become secondary to the much larger EU-China trade relationship at stake over the panels dispute.

Europe is China's most important trading partner, while for the EU, China is second only to the United States. Chinese exports of goods to the bloc totaled 290 billion euros last year, with 144 billion going the other way.

Responding to the EU's move to impose duties, China launched an anti-dumping inquiry into European wine sales, which may have led to exporters in France, as well as Spain and Italy, being hit with retaliatory duties.

EU and Chinese diplomats now expect that case to be dropped as a goodwill gesture, although officials declined to comment on Saturday.

(Additional reporting by Martin Santa in Brussels; Editing by Louise Ireland)

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Euro surveys lift shares after China disappoints - Reuters

1 of 9. Traders work at their desks in front of the DAX board at the Frankfurt stock exchange June 20, 2013.

Credit: Reuters/Remote/Lizza David

By Richard Hubbard

LONDON | Wed Jul 24, 2013 5:07am EDT

LONDON (Reuters) - Evidence of an economic revival in the euro zone and strong sales from technology bellwether Apple lifted world shares and the euro on Wednesday, offsetting earlier disappointing factory data from China.

Factories in the currency bloc increased output for the first time in well over a year, July's PMI index showed, after activity in Germany and France hit multi-month highs.

The data drove the euro to a one-month high against the dollar, helped extend a rally in European shares .FTEU3 and sent German bond futures down 0.3 percent.

MSCI's world equity index .MIWD00000PUS edged 0.1 percent higher to be up over 9.0 percent since its late-June lows.

Chief economist Chris Williamson of data compiler Markit said the German reading, which came in above the 50 mark that separates growth from contraction, indicated Europe's largest economy could grow by up to 0.4 percent in the third quarter.

"It's a very encouraging picture, it's pretty broad-based. Germany is leading the pack followed by France but even the (euro zone) periphery ... is seeing a return to growth in manufacturing," s Williamson said.

An earlier equivalent reading from China suggested the world's second largest economy was steadily losing momentum, knocking Asian stock markets and contributing to a 55 cent per barrel drop in Brent oil prices to below $108. Brent traded at $108.02 at 0844 GMT.

"This print could reignite fears of a Chinese hard landing," said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore. "We expect economic growth to continue moderating towards 7 percent."

PILLAR OF SUPPORT

China, which accounts for 40 percent of global copper demand and is a major importer of other raw materials, has been the pillar of support for commodity prices in recent years.

The Australian dollar, heavily exposed to Chinese demand, slipped 0.4 percent to $0.9254, down from a near one-month high of $0.9320.

The U.S. dollar rose 0.4 percent to 99.84 yen, moving away from a one-week low of 99.13 yen touched on Tuesday.

The dollar index .DXY extended gains, adding 0.3 percent to 82.153 after skidding to a one-month low of 81.926 on Tuesday.

Worries over a slowdown in China were fanned further when Japan reported exports to its giant near-neighbor had dropped to 4.8 percent in June from 8.3 percent in May.

Apple earlier said revenues from China dived 43 percent from the previous quarter, but that did not prevent it from posting better-than-expected sales and profits after the U.S. market closed on Tuesday, helped by 51 percent sales growth for its iconic mobile phone.

The results lifted company's shares by 5 percent in after-hours trade, saw technology stocks in Europe gain .SX8P and helped set the stage for a firmer start on Wall Street when trading resumes later.

(Editing by Catherine Evans, John Stonestreet)

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