China's Credit Nightmare Unfolding in Jincheng

The story below is about the coal industry in one small city of 2.2 million people (300,000 in the city proper) in Shanxi. The headline is the collapse of the coal industry, but the real story is a pattern of financing that repeats all over China, from Sichuan to Hebei, from Handan to Hangzhou.

Quartz: China’s coal companies are so desperate, they’ve started farming to keep employees busy
In an unusual attempt to prevent more protests, some of China’s biggest coal mining companies are now focusing on other businesses entirely, Chinese media reports. Coal mining companies in Jincheng, a city in north China’s Shanxi province have embraced pharmacies, solar power stations, restaurants, supermarkets, and vegetable and fruit planting, National Business Daily (link in Chinese) reported on Mar. 28.
What do coal miners know about pharmaceuticals and solar power? Nothing, but it keeps people employed. At least with New Deal in America, there was a temporary aspect to many projects. It's unclear how these coal mines are funding these ventures or if they're expected to last more than a few years.
But that’s not the worst part. Some Chinese coal firms are even faking their earnings to borrow from banks, Economic Information Daily reported (link in Chinese) on Mar. 29. An unnamed executive told the newspaper his company recorded a net loss of 1 billion yuan ($155 million) last year, but faked a 50 million yuan profit in order to extend their bank loans. “Coal firms are having a hard time in the next three to five years,” the company head said, adding “many firms probably won’t make through this year.”
It gets even better. I went to read the Chinese source article and came across this article 山西五大煤炭集团负债率82% 兄弟矿相互拆借较普遍 which says Shanxi miners are giving each other short-term loans to stay in business.

This is similar to the steel trading cases a few years ago and the situation in Xiaoshan in 2014 (Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave), where the entire entire city's economy was pushed to the edge of collapse by mutual credit guarantees. This is typical across local economies and industries in China. Many firms are mutually connected via a web of credit. This is also the situation in Jincheng, Shanxi, where even the profitable coal mines are now going bankrupt due to their lending practices:
Jincheng, a local coal industry insider even told reporters that since many coal mines cannot get bank loans and can only lend to each other, there are a number of profitable coal mines due to excessive lending other coal mines have run into funding problems, "mines earning a little money by lending have now lent themselves into bankruptcy."
The lending is taking place within larger corporate entities as well:
A finance staff Gaoping City Branch Energy Development Group Co., Ltd. subsidiary mine told the "Daily Economic News reporter," starting two years ago, some subsidiary coal mines were unable to borrow, even if the parent company guaranteed the debt, "two years ago in our company, another subsidiary coal mine borrowed 30 million yuan, said they would repay the loan in seven days, it has been nearly two years and they haven't repaid anything, we let the parent company demand repayment and they received nothing."

In fact, coal loans difficult situation in early 2014 appeared. Jincheng in the government work report for 2015, the arrangements for the new year's work had suggested that "to encourage the best use of coal enterprises to help various financing means, do everything possible to protect the coal business capital chain."

..."Two years ago, when the loan is not so tight, mines refinance old debt with new debt, but......this year Gaoping City Bank called in 500 million yuan in loans from a mine, and they cannot borrow another penny. Some mines are no longer unable to pay wages or borrow money, only to earn a little by lending to other mines, from tens of millions to hundreds of millions, and some mines have almost lent themselves to death."
What is the real cost of cleaning up zombie companies once all the secondary and tertiary industries with mutual loans and credit guarantees are added to the total? I have to believe Jincheng is like other cities where the debt risk was not isolated in the coal sector. Somewhere, perhaps the mining equipment supplier, is a conduit for contagion that could entangle one or more industries in the city. The worst case scenario is a situation like Xiaoshan, where much of the local economy was ensnared by defaults in 2014.

I've covered trust defaults and credit guarantee blow ups since they started popping up in 2014. Nearly all of them went away, but I wonder how much of that was due to extend and pretend, versus an actual clean up of the situation. If it was extend and pretend, swapping new debt for old, then the zombie industries are truly the tip of the iceberg, with all manner of unforeseen debt problems lurking beneath should credit conditions deteriorate.
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

Ludwig von Mises

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