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September 10, 2016

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Banks asked not to stop lending to troubled firms

CHINESE banks are urged not to casually cut off loans or cease lending to firms facing operational difficulties, as to do so hinders the reform process of state-owned enterprises even as corporate defaults rise, the banking regulator said in a notice yesterday.

“Any financial institutions connected to the borrower should act in concert, providing stable financing and stable support,” the China Banking Regulatory Commission said in a notice posted on its website yesterday. The CBRC added that institutions should utilize tools such as refinancing and extend loans with longer payment periods to help troubled businesses resolve their difficulties.

The CBRC suggested that creditors of a troubled borrower may form debt committees to assist borrowers facing debt problems and financial entities connected to the borrower can voluntarily join such committees.

The CBRC issued the notice amid rising bond defaults of SOEs, but some market insiders argued the defaults occurred due to banks cutting off the loans.

China’s bond market has seen 17 defaults occurring as of June 30 this year, almost triple the number in 2015.

The defaults included Dongbei Special Steel, a Liaoning-based unlisted steelmaker which defaulted on at least seven debt instruments worth 870 million yuan (US$130.3 million) this year.

“Banks now have no motivation to lend to those companies” as they are worried they could not service their loans, Ivan Chung, associate managing director of corporate finance at Moody’s Investors Service, told Shanghai Daily.


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