From News, Page 3, issue no. 378 July 28 2008
Translated by Ren Yujie
Original article: [Chinese]

Risk-management reports submitted last week by China's state-owned enterprises (SOEs) put tight financing at the top of the list.

A total of 31 SOEs submitted their 2008 risk management reports to the State-Owned Assets Supervision and Administration Commission (SASAC) in accordance with this year's requirement.

Around the same time, SASAC director Li Rongrong restated at a conference that SOEs were still "enduring the winter", and warned to tightly control SOEs' investment scale and set up "three red lines" for SOEs integration.

The "red lines" Li cited would forbid investment in projects unrelated to firms' core business, beyond firms' investment capacity; or with low return ratio.

The Chinese government has recently pushed measures to tighten up credit in order to prevent the economy from overheating and to clamp down on speculation in stock and real estate markets.

Top managers of Chinese SOEs have become increasingly vexed by tighter credit, as they had long enjoyed the ability to expand at will without worrying about financing.

2008 Risk Management Reports
The SOEs concerned included those in the fields of oil, electricity, iron and steel, real estate, and agriculture. SASAC officials and scholars set up A, B and C ranking for reports submitted based on how much they reflected the reality of each firm.

Attention paid to SOE risk management spiked after the China Aviation Oil (CAO) incident in 2004 where two of the firm's executives failed to inform the Singapore Exchange of CAO's ＄550 million in losses due to oil-derivative trading.

Two years later, SASAC released "Guidelines for State-owned Enterprise Risk Management", and in March of 2008, began requiring certain SOEs to compile risk management reports to be submitted within two years. SASAC's Enterprise Reform Bureau deputy director Zhou Fangsheng said the reports could be equated to a "medical checkup" on the firms.

Zhang Xuchao, CEO of First Huida, a risk management consulting company in Beijing, said the reports consisted of three major parts--descriptions of the risks facing SOEs in 2008, how risk management policies were being put to use, and future risk management plans.

First Huida had provided risk management services for some of the 31 SOEs, including State Development and Investment Corp. (SDIC), China National Oil and Gas Exploration and Development Corporation (CNODC). Zhang discovered that investment risks, especially overseas, macro-economic influence on businesses' cash flows, security risks and law risks were cared the most by SOEs.

While providing risk management services for more than 40 SOEs, Zhang found that SOEs in electricity, infrastructure and energy industries did not worry about financing at all in the past, and financial risk was not on the radar just two years ago.

Zhang said in the past, the banks were courting businesses, providing a myriad of preferential loan policies including granting rates at a 10% discount or pushing the repayment window to 15 years.

He added: "In the past, banks would give a business a two-billion-yuan credit limit without any terms. But things have changed now. Banks not only reduce credit limits, but also ask for mortgages and guarantees."

A financial accountant of an electricity business revealed that in the past, businesses could take out a bank loan with favorable terms if they could self-finance 20% of the way. However, banks were unwilling to give loans recently.

Li Sanxi, director of Zhong Tian Heng Mangement consulting firm, said the government's  tighter monetary policy this year hit iron and steel industry hard. For instance, an iron business which originally planned to invest over ten billion yuan in 2008 was short of more than five billion yuan currently.

Behind the Gap
Industry analysts said SOEs suffering the dilemma of "tight finance" not only due to raw material prices soaring and credit crunch caused by macro economy control, but also because of SOEs' development goals--especially those that were still aggressively expanding.

Latest figures from the National Bureau of Statistics of China (NBSC) showed that the producer price index (PPI) rose 8.8 percent year on year in June, and the purchasing price index of raw materials, fuel and power rose 13.5 percent year on year. Some SOEs complained that businesses' production costs increased as raw material prices soaring. Especially in thermal power industry, fuel costs would take over 70 percent in overall costs.

According to a staffer at one Chinese bank, costs of SOEs' previous investment projects soared as raw material prices rose, thus making the previous loan amount insufficient and causing a fund gap.

Another bank source said the Chinese central bank had set credit quotas, effectively limiting how much commercial Chinese banks could loan to a single business. The easy credit that SOEs enjoyed while the central bank maintained loose monetary policy was reigned in, and favorable loan interest rates were also cancelled.

A manager from the corporate business department of a state-owned commercial bank told the EO that so far, large SOEs were still the most important customers of Chinese commercial banks, and that projects were relatively guaranteed, but more importantly, they all had group guarantees and that the risk of breaches of contract were relatively small.

That did not mean loans to SOEs would never default. Management flaws at some SOEs could lead to misuse of credit.

In 2007 the China Banking Regulatory Commission found that some SOEs had diverted short-term loans into stock and real estate market investments. Before that, some SOEs were also discovered transferring loans to real estate firms for higher interest.

Sun Jianfang and Cheng Zhiyun also contributed to the article.