China’s banks told to stop lending to ‘zombie’ steel and coal firms

China’s banks have been told to tighten lending to bloated coal and steel companies, cutting off loans to firms that cannot compete while keeping credit flowing to the ones that can perform.

The instruction, jointly issued by financial regulators on Thursday, comes as Beijing tries to cut industrial overcapacity and guide state-run firms out of a morass of debt.

But the shift will eliminate more than a million steelmaking and mining jobs and could undermine social stability, as the redundant workers struggle to learn the skills valued by the consumer-led economy.

“Steel and coal industries are the main area where China is trying to slash capacity and the circular underlines the financial regulators’ role in pushing forward the move,” said Lu Zhengwei, chief economist of Industrial Bank. “There is no need to worry about a resurgence of so-called zombie companies, as we have local governments and regulators taking a tough stance over driving out those companies on the verge of collapse,” Lu said.

Banks had a key role to play in weeding out the poor performers, according to the circular, which was released by the People’s Bank of China, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the China Securities Regulatory Commission.

Taking the scalpel not the right solution for China’s steel woes

Lenders should recognise that the industry, although mired in excess supply, remained a key driver of the economy, it said. Banks should continue to extend credit to companies that were competitive or could stage a turnaround and help with deleveraging. Financial service companies should also help healthy players go abroad, assisting in raising capital in overseas markets through share and bond issues, it said.