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Lenders play it safe amid China property woes


Lenders are expected to stay cautious towards China’s cash-strapped property sector as Shenzhen-based developer Kaisa’s debt woes continue to rattle the market. But they will continue to lend to larger mainland companies.

“Companies from China will remain a major source of business for loan markets this year,” said Sonia Li, head of syndicated loans for Asia at JP Morgan. “But you will see a flight to quality for Chinese borrowers, particularly in light of what is happening in the real estate sector. Lenders will be very cautious to the real estate sector,” she added.

China has become a bigger part of Asia’s loan markets. According to Thomson Reuters data, China was the largest driver for loan growth in the Asia-Pacific region last year, accounting for $141.3 billion in loan volume or about 27% of the total in the region. Infrastructure, project and real estate deals accounted for slightly more than two-thirds of that volume.

Given the increasing exposure banks have to Chinese property, a protracted downturn could have a knock-on effect on the banks. “A lot of mid-sized and big Chinese banks as well as foreign banks have exposure to the China property sector. A big downturn in China real estate market would affect everyone but the mainland banks have the most exposure to the property market,” said Christine Kuo, senior credit officer at Moody’s.

For now, however, the rating agency views Kaisa’s problems as being unique to the company and, at a briefing in Hong Kong on Tuesday, Simon Wong, Moody’s senior credit officer, told reporters that he didn’t think the Shenzhen’s developer’s problems would pose a systemic risk to the sector.

“If the Kaisa case is resolved satisfactorily, such as another developer coming in and potentially buying Kaisa’s assets at fair market value, I think that would also help to ease investors’ concerns,” Wong told reporters.


Kaisa given respite but is still in the doghouse Kaisa default triggers broader loan worries Agile woe compounds China’s property problems Cofco Land plans up to $500m placement Loan Week, February 13-18

For now though, investors and lenders are giving the sector a wide berth.

Kaisa had been subject to unexplained bans imposed by the Shenzhen government on the sale of its property projects in Shenzhen. Reports had been circulating that other developers including Fantasia and China Overseas Land & Investment have faced similar bans but the companies have since clarified that the blocked sales are due to administrative procedures by the authorities, and not violations by the companies.

Lenders could also turn wary towards small-cap companies. “China is an important market but we expect more large-cap and higher grade companies this year compared to last year given the concerns over the mid-cap sector,” said Amit Khattar, head of syndicated loans for Asia at Deutsche Bank.

Subordination risk

Kaisa’s problems expose the risks that offshore lenders face. It had initially defaulted on a $51 million loan with HSBC. While it subsequently got a waiver from the British lender, other creditors have frozen some of its onshore bank accounts, and if it came down to a default, onshore lenders would get first dibs on the assets.

Offshore lenders are often subordinated to mainland lenders as the loans are typically issued through offshore holding companies, using the so-called red chip structure.

China’s State Administration of Foreign Exchange (Safe) has made moves to take away some of that subordination risk and, in July last year, relaxed the rules to allow mainland companies to use onshore assets as collateral when raising funds offshore. However, there are restrictions, and Safe has made it clear that the proceeds have to be kept offshore.

“The change in Safe rules means that offshore lenders can get senior secured access to Chinese companies rather than just a red chip structure,” said Khattar. “It is a meaningful development but the number of companies using this has been limited by restrictions over the use of proceeds,” he added.

Lenders have been comfortable lending to offshore holding companies, provided they are perceived to be a strong credit. For example, smartphone company Xiaomi last year tested the market with a debut $1 billion loan, which attracted 29 lenders. Xiaomi is cash rich, with no onshore borrowings.

However, weaker companies are expected to come under more scrutiny now. “Lenders have become more comfortable with loans using offshore holding company structures,” said Deutsche Bank’s Khattar. “But they will be more wary about certain credits,” he added.

This year could be a more challenging one for mainland companies as Taiwanese lenders are keen to keep their exposure to mainland companies down, and could look to diversify to Indian or Southeast Asian companies. “Taiwanese banks were big investors for China loans in the past but they have pretty tight China limits at the moment,” said JP Morgan’s Li.

But amid ongoing market volatility, more companies could start tapping the loan markets as bond yields have risen. “Bond market volatility specially in the high yield market could see more high yield issuers trying to access the loan markets in 2015,” said Khattar.

¬ Haymarket Media Limited. All rights reserved.

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China’s PBOC Braces for New Year Cash Demand With Loan Rollover

The People’s Bank of China rolled over a 269.5 billion yuan ($43.4 billion) lending facility to banks and added 50 billion yuan in loans as it seeks to ease liquidity ahead of the Chinese New Year holiday.

The facility, first issued in October with an interest rate of 3.5 percent, was rolled over to keep the money market stable, the central bank said in a statement on its official microblog account. It said the move also aims to smooth liquidity before the holiday, which begins Feb. 18.

The PBOC has sought to shore up liquidity and broaden stimulus efforts in recent months, cutting the benchmark lending rate in November and issuing billions of yuan in short- and medium-term loans to banks. Each year around this time, demand for yuan starts to spike as Chinese give each other red envelopes full of cash for the Lunar New Year holiday.

“There may be some irregular capital inflow and outflow around the world,” PBOC Governor Zhou Xiaochuan said at a World Economic Forum panel in Davos, Switzerland minutes after the central bank announcement. “That may also be a source of volatility.”

The PBOC doesn’t intend to provide too much liquidity, Zhou said in Davos.

China’s money-market rate climbed the most in a month today amid speculation banks will start hoarding funds to meet demands for cash. The central bank hasn’t conducted open-market operations since November. Last month, the PBOC reportedly rolled over part of a separate 500 billion yuan lending facility.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at

To contact the editors responsible for this story: Malcolm Scott at Nicholas Wadhams

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China central bank tightens loan, deposit measurement as shadow banking surges

BEIJING (Reuters) – China’s central bank is adjusting the way it measures bank deposits and loans, in a bid to increase supervision of cash in the banking system at a time shadow bank activity has seen a resurgence.

The move comes as freshly-released December loan data shows that the shadow banking portion of what China calls “total social financing” was the highest since January 2014, reversing the trend of shrinking off-balance sheet credit seen in most of last year’s second half.

The steps the People’s Bank of China (PBOC) are taking also show that its recent tweak to how loan-to-deposit ratios banks are calculated was not a form of monetary easing, but instead a preliminary step to applying further pressure on shadow banking.

According to a transcript of an official briefing to domestic media seen by Reuters on Thursday, the PBOC will include deposits by non-deposit-taking institutions made in accounts at banks deposit-taking institutions in calculations of deposits, and will include lending by deposit-taking institutions to non-deposit-taking institutions in loan calculations.


The transcript made particular mention of margin deposits from brokerages at banks. Regulators have signalled concern that a massive stock market rally set off in November is at risk of over-heating, given large quantities of cheap leverage provided through brokerage margin accounts.

The transcript quoted comments by Sheng Songcheng, the head of the PBOC’s statistics department, during a question-and-answer session to which foreign media were not invited.

“The changes in calculating deposit and loan items are aimed at making (Chinese standards) gradually be in line with usual international practices,” Sheng was quoted as saying.

“As these changes are aimed at more accurately reflecting the reality of social deposits loans, as well as liquidity conditions, people should not read too much into them on the policy front.”

Despite the crackdown, off-balance sheet lending led by entrusted loans and trust loans shot up in December, official data showed on Thursday, even as traditional yuan loans fell far short of expectations.

“Shadow banking is back with a vengeance, and I’m not sure why the year ended this way but it’s clear that there is a lot of money creation outside of the banking system,” Dariusz Kowalczyk, an economist at Credit Agricole CIB.

In December, Chinese banks extended far less credit than expected in December, despite instructions by the PBOC to lend more in the last months of 2014 to support the slowing economy.

(Reporting by the Beijing Newsroom; Additional reporting by Lu Jianxin and Pete Sweeney in SHANGHAI, and Jake Spring in Beijing; Editing by Richard Borsuk)

FinanceBanking & Budgetingbank depositsPBOCbanking system […]

New rules on bank deposits will inject less cash than some hope

By Lu Jianxin and Pete Sweeney

SHANGHAI (Reuters) – New rules changing how Chinese banks measure their savings base have more to do with squeezing shadow banking than monetary easing, and will inject far less cash into the system than many believe, Chinese money traders say.

The People’s Bank of China (PBOC) has enlarged the deposit base for banks by telling them to count in it their inter-bank deposits from non-bank financial institutions.

There’s a 75 percent loan-to-deposit ratio (LDR) for banks. Thus, making deposits larger, by definition, should let banks lend more.

Many see the PBOC move as a stimulus measure. Fitch Ratings said in a report on Tuesday that the change would enable banks to boost total credit by up to 6 trillion yuan (636 billion pounds).

Zhu Haibin, economist at J.P. Morgan, wrote on Friday that as banks temporarily do not need to set aside reserves on the additional deposits, the rule change lowers the system LDR by about 500 basis points and “hence removes LDR binding constraint in bank lending.”

But others don’t expect the rule change to have much impact on lending.


“Some analysts have exaggerated the potential effect of the central bank’s move because they only see half of the moon,” said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

“The move is not a policy tool (to ease) but a reform to include deposits that should have been included in the LDR supervision long ago,” he said. “That means the PBOC can follow up by including interbank loans into the LDR’s lending base to keep policy consistency.”

Lu was referring to widespread speculation that the rule adjustment was an attempt to simulate a major easing move, such as reducing the reserve ratio requirement (RRR) or cutting interest rates, by injecting cash into the system sideways, without flooding the market with more cash than it can digest.

To some analysts, the LDR ratio has not been a constraint on Chinese bank lending, so the broadened definition of deposits provides room for lending that banks won’t necessarily use.

The latest data issued by the China Banking Regulatory Commission shows that the daily average LDR of Chinese banks in the third quarter stood at only 66.8 percent, up slightly from 64.3 percent at the end of June.

“Most Chinese banks rarely lend up to the limit of the 75 percent of their deposits, let alone do so in the current environment of lacklustre cash calls thanks to slowing economic growth,” said a dealer at a major state-owned bank in Shanghai.

“The money some say is being freed up for lending has already been in the markets for a while; it’s not like a fresh injection via an RRR cut.”


Fresh money would be provided by a central bank cut in the RRR, which J.P. Morgan’s Zhu and many other economists still think the PBOC will eventually make.

Traders see the new regulations as targeting the growth of interbank deposits created by non-bank institutions, in particular those from the securities industry, special purpose vehicles (SPVs), non-banking financial deposits as well as overseas deposits.

The crackdown makes sense, given signs new players – in particular brokerages – have exploited regulatory loopholes to expand their shadow banking business rapidly despite the regulatory crackdown. Official measures are now seen underestimating the shadow sector by up to $2.6 trillion.

Fitch said the new regulations would also increase the disclosure of shadow bank lending on the balance sheet and thus improve transparency.

“By recognising these exposures as loans, banks would also have to increase provisioning against non-performing assets,” it said.

(Editing by Nachum Kaplan and Richard Borsuk)

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Alderon Implements Cash Preservation Program

VANCOUVER, BRITISH COLUMBIA–(Marketwired – Dec 9, 2014) – Alderon Iron Ore Corp. (ADV.TO)(NYSE MKT:AXX) (“Alderon” or the “Company”) reports that it has implemented a comprehensive cash preservation program that will allow the company to maintain a healthy working capital position into 2017 without the need to access equity or debt financing during the intervening period, aside from the financing required to commence construction at the Kami Iron Ore Project. Measures associated with this program include a number of voluntary vendor payment deferrals and relief from debt servicing requirements such as those outlined in the transaction with Liberty Metals & Mining Holdings, LLC (“LMM”) described below, and workforce reductions. The Company has kept its core team of executives intact which will allow it to continue to advance the Kami Project construction financing efforts and to commence construction in a rapid and seamless manner once such financing has been obtained.

“These cost savings measures do not mean we are now on care and maintenance,” says Mark Morabito, Executive Chairman of Alderon. “We are working more closely than ever with our partner Hebei Iron and Steel (“HBIS”) on increasing Chinese participation in the project in order to increase access to available capital from China. Earlier this year, The China National Development and Reform Commission (“NDRC”) said Chinese steelmakers should keep building up stakes in global iron-ore assets in the interests of China’s strategic security and “speaking rights,” or influence, in global trade. China’s ore imports rose 10% in 2013 to a record 819 million metric tons, according to customs data. The NDRC also said that China’s iron-ore demand will still rise, its reliance on imports won’t change, and the degree of monopoly in global iron-ore resources will still keep increasing.” Mr. Morabito adds, “this continuing commitment from our Chinese partners under NDRC mandate gives us confidence that we will be able move the Kami project into construction.”

One of the critical payment deferrals is in regards to the loan agreement (the “Loan Agreement”) that Alderon and its affiliate, The Kami Mine Limited Partnership, previously entered into with LMM for an amount of $22 million (the “LMM Loan”). The LMM Loan has interest payable semi-annually on June 30 and December 31 of each year at a rate of 8% per annum. The principal and interest amounts of the LMM Loan are convertible into common shares of Alderon. LMM has agreed to defer the next two interest payments due under the LMM Loan. These payments total $1,795,200 with $880,000 payable on December 31, 2014 and $915,200 payable on June 30, 2015. The deferred interest payments will be added to the principal amount of the LMM Loan and paid at maturity on December 31, 2018.

As consideration for the deferral of these interest payments, it has been agreed that LMM will receive common share purchase warrants. The number of warrants that will be received by LMM for each interest payment will be calculated by dividing the amount of the interest payment by the volume weighted average trading price of the Alderon common shares on the Toronto Stock Exchange for the five trading days prior to the date of each interest payment, plus a 10% premium (the “Warrant Price”). Each warrant will be exercisable until December 31, 2018 to acquire an Alderon common share at the Warrant Price.

About Alderon

Alderon is a leading iron ore development company in Canada with offices in Montreal, Vancouver, St. John’s and Labrador City. The Kami Project, owned 75% by Alderon and 25% by Hebei Iron & Steel Group Co. Ltd. (“HBIS”) through The Kami Mine Limited Partnership, is located within Canada’s premier iron ore district and is surrounded by three producing iron ore mines. Its port handling facilities are located in Sept-Îles, the leading iron ore port in North America. The Alderon team is comprised of skilled professionals with significant iron ore expertise to advance Kami towards production. HBIS is Alderon’s strategic partner in the development of the Kami Project and China’s largest steel producer.

For more information on Alderon, please visit our website at


On behalf of the Board

Mark J Morabito, Executive Chairman

Cautionary Note Regarding Forward-Looking Information

This press release contains “forward-looking information” within the meaning of the U.S. Private Securities Litigation Reform Act and Canadian securities laws concerning anticipated developments and events that may occur in the future. Forward-looking information contained in this press release include, but are not limited to, statements with respect to: (i) the time period that the Company’s working capital will last for, (ii) future debt and equity financings, (iii) future Chinese iron ore demand, (iv) commencement of construction at the Kami Project, and (v) the development of the Kami Project.

In certain cases, forward-looking information can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved” suggesting future outcomes, or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. Forward-looking information contained in this press release is based on certain factors and assumptions regarding, among other things, receipt of governmental and other approvals, the estimation of mineral reserves and resources, the realization of reserve and resource estimates, iron ore and other metal prices, the timing and amount of future exploration and development expenditures, the estimation of initial and sustaining capital requirements, the estimation of labour and operating costs, the availability of necessary financing and materials to continue to explore and develop the Kami Project in the short and long-term, the progress of exploration and development activities, the receipt of necessary regulatory approvals, the estimation of insurance coverage, and assumptions with respect to currency fluctuations, environmental risks, title disputes or claims, and other similar matters. While the Company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Forward looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Such factors include risks inherent in the exploration and development of mineral deposits, including risks relating to changes in project parameters as plans continue to be redefined including the possibility that mining operations may not commence at the Kami Project, risks relating to variations in mineral resources, grade or recovery rates resulting from current exploration and development activities, risks relating to the ability to access rail transportation, sources of power and port facilities, risks relating to changes in iron ore prices and the worldwide demand for and supply of iron ore and related products, risks related to increased competition in the market for iron ore and related products and in the mining industry generally, risks related to current global financial conditions, uncertainties inherent in the estimation of mineral resources, access and supply risks, reliance on key personnel, operational risks inherent in the conduct of mining activities, including the risk of accidents, labour disputes, increases in capital and operating costs and the risk of delays or increased costs that might be encountered during the development process, regulatory risks, including risks relating to the acquisition of the necessary licences and permits, financing, capitalization and liquidity risks, including the risk that the financing necessary to fund the exploration and development activities at the Kami Project may not be available on satisfactory terms, or at all, risks related to disputes concerning property titles and interest, risks related to disputes with Aboriginal groups, environmental risks and the additional risks identified in the “Risk Factors” section of the Company’s Annual Information Form for the most recently completed financial year, which is included in its Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission (the “SEC”) or other reports and filings with applicable Canadian securities regulators and the SEC. Accordingly, readers should not place undue reliance on forward-looking information. The forward-looking information is made as of the date of this press release. Except as required by applicable securities laws, the Company does not undertake any obligation to publicly update or revise any forward-looking information.


Hidili Seeks Loan Relief as Rating Downgrades Curb Bond Chances

Hidili Industry International Development Ltd. (1393) is turning to lenders to ease its cash strain after four rating downgrades make it harder for the Chinese coal mining company to sell bonds overseas.

Losses at the Sichuan-based miner widened in the first half of this year as average clean coal selling prices fell about 18.5 percent, it said in a Hong Kong stock exchange filing Aug. 8. Cash dwindled to 193.7 million yuan ($31.5 million) on June 30 from 322.2 million yuan at the end of 2013, just enough to service the next semi-annual coupon on its $380 million 8.625 percent notes in November.

“The company is getting new facilities” and is unlikely to face difficulty rolling over existing debt, Cathy Huang, a Chengdu, Sichuan-based spokeswoman, said via e-mail Aug. 15 in response to questions from Bloomberg News. “Do you think the market can offer us good and attractive terms with our existing rating?” she said, asked whether Hidili planned to issue new bonds to repay its $380 million of senior debt.

Standard & Poor’s has downgraded Hidili four times in the past two years, most recently in April to CCC with a negative outlook. That’s eight levels below investment grade, signaling non-payment risk. The company is among 12 of 50 locally listed miners with debt-to-equity ratios over 100 percent, Bloomberg data show.

Rising Debt

Hidili shut its wholly-owned coking plant Panzhihua City Hidili Coke Co. last year and booked a 257.5 million yuan loss. It’s one of 2,000 mines earmarked by Premier Li Keqiang to close by the end of 2015 to cut pollution and overcapacity.

Hidili’s November 2015 notes fell 0.97 cents on the dollar to 59.05 cents as of 5:05 p.m. in Hong Kong, Bloomberg-compiled prices show, pushing the yield up 194 basis points to 61.391 percent. The securities have lost 13 percent this year while corporate distressed debt in emerging markets gained 8.6 percent, based on a Bank of America Merrill Lynch index.

Hidili hasn’t sold dollar-denominated securities since tapping investors in October 2010 for the 8.625 percent bonds. Those notes are the only time it’s raised debt in the U.S. currency, data compiled by Bloomberg show.

Funding Plan

“The company needs to show how it plans to term out its liabilities,” Cheong Yin Chin, a high-yield analyst in Singapore at CreditSights Inc. said by phone today. “I don’t think they can sell bonds, onshore or offshore, given their financial condition. Investors are wary of the mining sector.”

Total debt at Hidili rose 6.7 percent to 8.627 billion yuan as of June 30 from six months ago, according to Bloomberg-compiled data. Most of its 2.42 billion yuan of bank loans are secured by collateral and securities and may be rolled over without difficulty, Huang said in the e-mail.

While Hidili appears to have converted some of its short-term loans into longer-term debt, a liquidity crunch remains, Cheong said in her report on Aug. 8. Total debt has increased, while cash in hand isn’t sufficient to repay obligations due within 12 months, she wrote.

Shares in Hidili closed down 3 percent at HK$0.98 in Hong Kong, the lowest since July 25. The stock has lost 17 percent this year.

To contact the reporter on this story: David Yong in Singapore at

To contact the editors responsible for this story: Katrina Nicholas at Ken McCallum

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Must-know: Will Walter Energy survive the downturn?


Being a pure play met coal producer isn’t good for Walter Energy (Part 9 of 9)

(Continued from Part 8)

Will Walter Energy survive the downturn?

Walter Energy (WLT) has been burning cash continuously for the past several quarters. The cash burn has forced the company to refinance the term loan with high cost notes. The move has simply extended the lifeline at the cost of higher interest expenses going forward. The company now has no major repayment obligation until 2018.

While the refinancing was possible in this case, the possibility of refinancing the maturing 2018 obligation will be weak given the recent downgrade by rating agencies. Also, if the company keeps burning cash for the next few quarters, the financial position of the company will deteriorate leading to the possibility of further downgrades.

One positive

One positive thing about the company during the quarter was that it has finally responded, or was forced to respond, to current oversupply in the metallurgical coal market by idling Canadian operations. The move along with similar initiatives, although “active” ones, taken by peers (KOL) such as Peabody Energy (BTU), Alpha Natural Resources (ANR), and Arch Coal (ACI) will help curb oversupply in the industry and may support metallurgical coal prices.

The company derives the majority of its revenues from exports to Europe and Asia. The Chinese purchasing managers’ index (or PMI) clocked a reading of 51.7 in July compared to 51 in June. Since PMI is considered to be an indication for the economy, a better reading translates to better days ahead for the economy and in turn fuel demand for steel. Metallurgical coal is used in steel production, which will make the metallurgical coal demand increase as well.

Will Walter Energy survive?

The answer to the question largely depends on two factors—the trajectory of met coal price and the met coal production in Australia. Right now, the met coal game seems to be the one in which everybody is burning cash hoping for good days ahead. Among its peers, Walter Energy is clearly at a disadvantage due to its “pure-play met coal producer” tag. However, it has bought time until 2018 through refinancing. The concern is whether the current liquidity with the company will last until 2018 or will the company be able to refinance in 2018 if met coal prices remain subdued.

Read the Market Realist’s Coal page to learn more about this important industry.

Browse this series on Market Realist:

Part 1 – Must-know: An overview of Walter Energy Part 2 – Must-know: State of the US metallurgical coal industry Part 3 – Why lower cash costs didn’t help Walter Energy make money FinanceBasic Materials IndustryWalter EnergyPeabody Energy […]

Chinese consumers switch gears from cash to credit for car buys

By Samuel Shen and Umesh Desai

SHANGHAI/HONG KONG (Reuters) – In a country where owning a car has long been a symbol of luxury and success, around 85 percent of Chinese car buyers still buy cars with cash.

But people like Chinese accountant Grace Mi and her peers in their 20s and 30s are changing the car financing game and are the ones catching the attention of global carmakers looking to boost revenue and defend margins in an increasingly competitive market.

These young people are willing to buy big-ticket items like a car on credit – a behavior unheard of some 15 years ago in China – and have led carmakers to boost their financing units in the mainland.

The push by automakers to steer more people to buy on credit comes as part of their broader efforts to make up for sliding margins on new-car sales in China where more companies are cutting prices to entice buyers. Other key revenue sources include maintenance and repairs, vehicle leasing and sales of accessories and parts.

Mi, a 27-year-old accountant in Beijing, did not have enough cash on hand to outright buy her dream car, a Nissan Sylphy, with a price tag of about 150,000 yuan ($24,200). Instead, she saved enough money for a down payment and took out a loan.

“I didn’t want to take a penny from my retired parents,” Mi said, adding that owning a car had become increasingly important for her personal and work life. “I didn’t have to wait for years to own a car.”

Mi has been repaying 2,500 yuan, or one-fourth of her monthly wage, since November for her Sylphy. While the loan payments are not small, she says she doesn’t feel burdened.

“Accountants are needed everywhere so I’m not worried about job security. I don’t think I am enslaved by the car loan.”


Around 70 percent of car buyers in the United States and other developed countries take out loans, according to a Deloitte report in 2012 and the reason global carmakers are trying to seize on the rise in auto financing in China is because the sector is highly profitable.

The financing unit of Ford Motor Co contributed nearly a quarter of the Deerborn, Michigan-based company’s overall profit last year while rival GM saw 12 percent of its profit come from its finance unit.

“China’s car market remains primarily a cash market, but it is starting to move to credit,” John Lawler, head of Ford’s operations in China, told Reuters in an interview. “It’s a demographic and generational phenomenon. Those people who finance cars are primarily younger buyers.”

China’s central bank gave the sector a boost in early June when it cut the amount of money auto financing firms need to set aside as reserves in a bid to stimulate the economy which is showing signs of slowing.

Global carmakers have been funding their financial units’ expansion by selling off their loans in the form of asset-backed securities to beef up their operations in China. That frees up money they can use to lend to Chinese consumers.

So far this year, the financing units of Ford, BMW , Volkswagen AG , Nissan Motor Co Ltd <7201.T> and Toyota Motor Corp <7203.T> have each issued around 800 million yuan ($128.85 million) of asset-backed securities.


The country’s automobile association forecast the auto financing industry to more than double to 525 billion yuan ($84.55 billion) by 2025.

In an email to Reuters, GMAC-SAIC Automotive Finance Co Ltd, the financing joint venture of General Motors Co in China, said auto financing will be “integral in facilitating sales” in the world’s biggest auto market.

Bankers and analysts say the chances of car loan defaults are limited in China because the country requires a large down payment – 20 percent for new cars. Consumers here also have a higher savings rate compared with other countries like the United States.

“It is viewed as a future source of income rather than a source of default and losses,” said Patrick Steinemann, co-head of Asia Industrials Investment Banking at Bank of America Merrill Lynch in Hong Kong.

Indeed, GM’s China chief, Matt Tsien, said financing has proved a “steady business” in China.

“One of the characteristics in the Chinese market that’s very good for the financing business is that default rates tend to be very low,” he told Reuters in Detroit. “So the risks are pretty good in that sense. People tend to pay up,” Tsien said.

Such a rapid expansion in auto financing does have risks, coming at a time when worries are mounting over the country’s corporate and government debt. These include the fact that, relatively, Chinese consumers have a short credit history.

One executive at Toyota said the Japanese carmaker has encountered some fraud cases involving fake IDs that first appeared about a year ago in southern China and then began spreading to other parts of the country.

Toyota uses a set of risk assessment tools modeled around those used in other countries and refined to local practices in China that are being used by global carmakers, two Toyota executives said. Both declined to be identified because they were not allowed to speak the media.

Toyota has further beefed up its loan assessment process and on occasions turn to the old-style approach of home visits, they added.

“Home visits are still the most direct way of verifying customer addresses, but due to time and labor requirements we can only use it sparingly,” one of the executives said. ($1=6.21 yuan)

(Additional reporting by Shanghai newsroom, Jane Lee, Norihiko Shirouzu and Paul Ingrassia; Writing by Kazunori Takada; Editing by Norihiko Shirouzu and Matt Driskill)

FinanceAuto LoansChina […]

Harare Town Clerck spent Chinese loan cash on posh cars

HARARE mayor Bernard Manyenyeni has launched an investigation into allegations his town clerk used part of a Chinese loan meant for water projects to buy 26 luxury vehicles without authorisation from city fathers.

Manyenyeni early this year suspended the own Clerk, Tendai Mahachi, but the move was blocked by local government minister Ignatius Chombo.

The mayor announced the probe during Thursday’s council meeting after it emerged that the local authority has used $8 million of the $144 million loan facility from China.

The loan was meant for a water distribution rehabilitation project currently underway at Morton Jaffrey water works.

During Thursday’s meeting, councillors accused Mahachi of having a “hidden motive” by not disclosing the expenditure.

They went on to demand a detailed report on how much of the loan has been used and how many vehicles were procured without the knowledge of the city fathers.

Deputy mayor Thomas Muzuwa demanded a breakdown of how the loan has been used, suggesting that there could have been misappropriation of funds.

“Maybe we are just relaxed when there is no longer a single cent remaining under the deal. Why should we be kept in the dark when such things happen?” Muzuwa asked forcing Manyenyeni to call for a probe.

“When we procure anything in council it has to be brought in light because residents’ money will be used.

“It surprising to see new vehicles lining up in the car park while others are already in the field without us as councillors being informed; we demand to know how things are now being run in this council,” he said.

Muzuwa said they were informed that 26 top of the range vehicles were bought, but Harare water Director, Christopher Zvogbo who was representing the town clerk said he was aware of only 13 vehicles and also acknowledged that $8 million was used.

When he appeared before a Parliamentary probe recently, Manyenyeni told legislators that the loan deal was shrouded in a lot of controversy with the equipment and material procured using the funds over priced by double their value.

“On the issue of the Chinese project, we are seized with understanding how the costing was arrived at,” Manyenyeni said then.

“The costs are definitely questionable. In a number of areas some have been itemised and some have not been itemised,” Manyenyeni said.


Mahachi did not attend the meeting to defend himself, a move that some councillors said he might be hiding something by absenting without a reason.


Three banks offer $4.95 bln bridge loan for OCBC's Wing Hang deal-sources

(Adds details of the loan, background)

By Prakash Chakravarti and Saeed Azhar

HONG KONG/SINGAPORE, April 2 (Reuters) – Three banks are providing a fully underwritten $4.95 billion bridge loan to Singapore’s Overseas-Chinese Banking Corp Ltd (OCBC) to fund its offer to buy Hong Kong-based Wing Hang Bank, according to sources close to the matter.

Bank of America Merrill Lynch (BofA), HSBC and J.P. Morgan are sharing equal underwriting of the loan, the sources said, which will have a 12-month tenor.

The size of the loan, which is the same as OCBC’s all-cash offer for Wing Hang, shows how hungry lenders in the region have become to book assets and finance large acquisitions.

BofA, HSBC, and J.P. Morgan declined to comment. OCBC did not return a call seeking comment.

OCBC said on Tuesday that it has agreed to buy Wing Hang for HK$125 per share, or $4.95 billion, in a deal that would give the Singapore lender a much sought-after gateway to the Greater China region.

The sources said the bridge will be taken out by capital markets fundraisings to be determined later this month. OCBC said on Tuesday that it planned to raise equity but did not give more details.

OCBC’s bridge loan will be the second such banking acquisition-related loan in Hong Kong in recent months.

Last October, four banks provided a $1 billion bridge loan to Yue Xiu Enterprises Holdings Ltd for its HK$11.64 billion ($1.50 billion) purchase of a 75 percent stake in Hong Kong lender Chong Hing Bank Ltd.

Record low interest rates across the globe have fuelled cheap loans and huge borrowing levels in Asia. Following the region’s quick recovery from the 2008 financial crisis, banks have thrown themselves at the feet of companies with strong credit ratings and the desire to purchase assets at home and abroad.

While that has helped Asian companies expand their businesses, leverage levels across the region have risen sharply, sparking concerns that a sharp economic slowdown would spark the kind of debt distress China is showing signs of.

The $8 billion loan for Chinese e-commerce giant Alibaba Group completed last July is an example of the appetite among lenders. Nine banks underwrote the loan initially, while nine other lenders joined the deal subsequently.

($1 = 7.7571 Hong Kong Dollars) (Reporting by Prakash Chakravarti of IFR/LPC and Saeed Azhar; Editing by Michael Flaherty and Ryan Woo)

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