Escalating Debts Fear To Impact China’s Target Of Reducing Steel And Coal Over-Production

Chinese economy struggles

Over-production has become the focal point for Beijing as it aims to boost its dwindling economy and tackle the supply gluts which have hit hard on the prices of steel and coal.

China’s struggle to reduce its over producing industries may face further delays caused by over 1 trillion pounds of debt in its steel, coal, cement and non-ferrous metals industries, a situation that may engulf the country’s banks.

Dealing with the issue of over-production has become the focal point for Beijing as it aims to boost its dwindling economy and tackle the supply gluts which have hit hard on the prices of steel and coal.

China plans on putting in around $15 billion into their economy over the coming two years to help tackle job losses in the coal and steel sectors, but will only happen after full clearance of outstanding debts has taken place.

According to critics, there is a lack of clarity over how to handle the debt load, an issue that is likely to exert more pressure on the already weakened sectors of the banking industry.

Figures which have been presented to the legislative assembly of China this month show that there is a clear problem being taken on by state-firms who are struggling with overcapacity and how challenging it will be for Beijing to accomplish the fundamental portion of reforms for the economy.

It is is reported that the expenses accruing as a result of layoffs from the coal sector are approximated at 195 billion Yuan.  Representatives from the coal sector who attended the legislative assembly persuaded the government to offer increased aid to help tackle the escalating debts of the desperate firms.

Based on the official papers presented by Wang Mingsheng of Huaibei Mining, the four main sectors focused on in the fight against surplus production owe approximately 10.2 trillion Yuan. According to the country’s data, the amount owed by coal and steel stands at 8 trillion Yuan with close to a third being in the form of bank loans.

According to analysts, if 20 per cent of the debt goes bad this year, which is a possibility, it would negatively impact Chinese bank’s non-performing loans and drive them up by 50 per cent.

Bankers affirm that banking institutions established by government executives are more at risk, adding that the already increased official NPLs, which went up last year by half, underrate the magnitude of their poor lending.

Xu Zhongbo, who is a consultant in the steel industry advised that the country should consider the establishment of a special bank that will bear the current debts, if all the regional banks have to be saved from bankruptcy.

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