China Tightens Coal and Steel Finance While Encouraging Exports

  • Central bank prohibits lending to unqualified projects
  • Companies encouraged to shift projects and products overseas

China’s central bank is tightening finances to steel and coal projects to help accelerate the government’s culling of industrial overcapacity, while encouraging companies to export products and projects overseas.

The country’s banks should provide more support for coal and steel companies to build new projects in foreign markets, People’s Bank of China said in a statement on its website Thursday. The bank will also consider introducing support to help coal and steel enterprises manage foreign-exchange risks, it said.

The world’s largest steel and coal producer is seeking to ease a glut of industrial capacity as it shifts toward consumer-led growth and curbs pollution. The central bank guidance follows similar efforts to trim production, including bans on new coal mines and land approvals for new steel and coal projects.

China is seeking to cut about 9 percent of its coal mining capacity and as much as 13 percent from steel making within five years, the country’s state council said in February. That may result in layoffs of about 1.3 million workers in the coal industry and 500,000 steel workers.

Export Bad News

“The PBOC statement is in line with the China’s policy goals to cut coal and steel overcapacity,” Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong, said by phone. “The bad news is that exports, especially for coal, may further flood international commodity markets and drag down prices.”

Coal use in the world’s largest producer and consumer is weakening amid a push by President Xi Jinping to use cleaner fuels and shift a slowing economy away from heavy industry. Shanxi Province in the northern part of the country, which alone produces more coal than any other country, said in a report last month that it is seeking overseas markets to absorb part of the excess supplies. It proposed that the central government reduce or scrap export quotas and cut taxes.

The nation’s coal exports increased to 1.27 million metric tons last month, the highest since May 2012, according to customs data. China’s demand for coal, which accounted for 64 percent of the country’s total energy use last year, is forecast to fall for a third year in 2016.

Steel Shipments

China’s steel exports surged to a record last year as its mills shipped a growing surplus overseas, triggering trade tensions and hitting profit margins worldwide. Outbound shipments grew 8 percent year-on-year in the first quarter, while China’s domestic crude steel output reached a new monthly record in March.

Commercial banks should prohibit lending to coal and steel projects that aren’t part of China’s national planning and reduce or withdraw money from coal and steel projects that lack competitiveness, the PBOC said Thursday.

The tightening supports China’s efforts to consolidate smaller companies into bigger, more-efficient firms, Lau said. Smaller coal miners and steel mills are usually heavy polluters and difficult to regulate.

“Without lending from banks, they will either die or agree to merge with bigger players that are more qualified to get financial support,” Lau said.

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