BEIJING/SHANGHAI The problems at China's Yingli Green Energy Holding Co Ltd (YGE.N), the world's No.3 solar-panel maker, are going from bad to worse as the company struggles with mounting losses, collapsing product prices and a stock in free-fall.
And yet, despite a government directive to rein in loans, Chinese banks keep extending credit to the New York-listed firm, and at below-market rates. Outstanding short-term borrowing has almost tripled to 8.2 billion yuan ($1.3 billion) since 2009, according to Yingli's 2011 annual report.
"You sometimes have to wonder why a certain loan was made," said Stanley Li, head of China bank research at Mirae Asset Management. "One problem with many Chinese banks is that we do not have much insight into their lending practices."
Yingli is one of many companies in China receiving life support from the country's banks. That support - at a time when China's economy and financial system are also under pressure - is raising fears that a spike in bad loans will push Chinese lenders into default.
"Banks like lending to us," said Yingli's Chief Financial Officer Bryan Li in an interview. "They feel that we are a potential winner if there is any consolidation in the industry."
That feeling may come back to haunt the banks.
A Reuters News analysis on 40 of China's most indebted companies - most of them from sectors already reeling with overcapacity such as wind-turbine maker Xinjiang Goldwind Science & Technology Co Ltd (002202.SZ) and COSCO Shipping Co Ltd (600428.SS) - showed debt levels rising as profits decline across industries that Beijing has said it wants to promote.
On average, operating profit at these companies dropped 15 percent in 2011 as their debt piles grew by the same percentage, according to company and Thomson Reuters data.
China's big banks deny they are extending fresh loans to struggling companies, with officials saying risks are under control. The country's banking regulator also dismissed such concerns, saying asset quality was sound.
"Right now, bank profitability is relatively strong," said Shang Fulin, chairman of the China Banking Regulatory Commission. "They have the ability to raise their provisions for loan losses and write off some bad loans to prevent future risks."
Earnings announcements in late October by Chinese lenders suggest otherwise, with signs increasing that bad debts are on the rise and profit growth easing. The country's biggest lenders are all expected to post their weakest earnings growth since their IPOs.
Overall corporate debt levels will increase to 122 percent of gross domestic product by the year-end from 108 percent at end-2011, according to Beijing-based consultancy GaveKal-Draganomics. That's higher than most other large developing economies such as Brazil and India, and surpasses the 90 percent that the OECD considers risky.
STORING UP TROUBLE
China's central bank says the country's lenders have a non-performing loan (NPL) ratio of just 0.9 percent.
But that figure is the subject of heavy skepticism.
Goldman Sachs & Co (GS.N) estimates in a research note that the NPL ratio is more than six times the official rate. That's already less pessimistic than most investors, who expect NPL levels of at least 10 percent, according to the bank.
Much of the pressure to lend to unprofitable firms comes from the government's desire to prevent a total collapse in industries struggling in an economy that has slowed for the seventh consecutive quarter.
"If you run a bank's operations in a certain province and the governor tells you to roll over a loan, you are going to do it even if it doesn't make commercial sense," said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners.
Beijing wants banks to continue lending out of fear that companies may be forced to start dumping inventory at below cost if credit is cut off, pushing commodity prices down further and threatening the solvency of strong players.
"If lenders stopped rolling over debt, everyone would have trouble. Then, there would be a chain reaction and there will be a systemic risk," said Zhang Zhiming, head of China research at HSBC.
BALANCE SHEET WOES
At Xinjiang Goldwind, China's No.2 wind-turbine maker, its operating income plunged 62 percent last year from 2010. At the same time, new bank loans more than tripled to over 11 billion yuan.
The same story is repeated at many of China's largest companies, many of them state-owned and in industries that Beijing says it wants to develop.
China Shipping Development Co Ltd (600026.SS) reported a one-third fall in operating income in 2011, but liabilities rose 55 percent.
Aluminum Corporation of China Ltd (Chalco) (601600.SS), the world's No.3 aluminum producer, swung to an operating loss from a profit a year earlier.
That didn't stop the firm from getting new loans.
Banks including China Construction Bank Corp (CCB) (601939.SS) continued to lend merrily, extending 25 billion yuan in new loans to Chalco, according to the company's annual report.
CCB declined to comment on specific clients.
"The major motivation here is not economic," said Emil Wolter, head of Asian strategy at Macquarie.
"With many of these companies basically unprofitable with no direct prospect of being profitable, as a bank, you should not be providing them with further capital to expand even more. It doesn't make a lot of sense."
(Additional reporting by SHANGHAI newsroom; Editing by Michael Flaherty and Ryan Woo)