Top China Coal Region Asks Banks to Lend a Hand to its Producers

  • Shanxi urges banks not to cut back lending to 7 coal companies
  • Government doesn’t want 2016 coal financing to drop from 2015

A small Chinese province that churns out more coal than all of the U.S. is urging banks to help keep its producers afloat.

The Shanxi province has asked banks to support seven coal companies by adjusting lending periods and repayment methods, the official Xinhua news agency reported, citing rules from the local government. “High quality” firms with a certain level of solvency and have been progressively cutting capacity should be helped, according to the report. Such moves are aimed at guaranteeing financing for the fossil fuel doesn’t fall below last year’s levels.

Chinese coal producers have struggled as the nation’s worst economic slowdown in a quarter century batters demand and Premier Li Keqiang vows to cut excess capacity in cash-burning industries. At least 11 companies have defaulted on onshore debt obligations this year, and data compiled by Bloomberg show that producers need to repay 233 billion yuan ($35.4 billion) of bonds coming due by the end of 2016.

“It’s understandable that banks are urged to support Shanxi’s coal companies because it’s the backbone of the province. Nothing can go wrong with the industry,” Alvin Cheng, an associate director at Fitch Ratings Ltd. in Shanghai, said by phone. “The tricky part is whether the headquarters of these banks, which are owned by the central government, will fully cooperate with the local government body.”

Piling Debt

Total debt of the seven producers owned by the Shanxi government climbed to 1.2 trillion yuan at the end of 2015, just 100 billion yuan less than the province’s gross domestic product that year, according to a May 5 report from Citic Securities Co. The local government planned to guarantee note sales from these companies, people familiar with the matter said last month.

“Overall, this will just speed up industry consolidation by separating the seed from the chaff, as it says it will warrant loans to the top seven but will limit loans to non-performing miners,” Helen Lau, an analyst with Argonaut Securities (Asia) Ltd., said by e-mail.

The Shanxi government also proposed an expansion in bond issuance by these coal companies, according to the Xinhua report, adding that perpetual bonds and acquisition bonds are among proposed tools for restructuring debt. It also urged asset management firms to liquidate bad loan assets in the industry in order to reduce the province’s bad loan ratio by the end of the year.

— With assistance by Sarah Chen

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