Sailing into a storm?

Wang Junmin, Sainty Marine’s chairman, on IPO day in Shenzhen

Sainty Marine was one of China’s luckier shipmakers. The biggest state-backed ship manufacturer in Jiangsu province, it went public in 2011 shortly before the Baltic Dry Index – which tracks freight rates – plunged to record lows.

Having raised Rmb800 million ($131 million) in shareholder capital, the company said it would take advantage of the crisis. Times were tough, it was true. But they were even worse for some of Sainty’s competitors.

But rather than grow its marine business, Sainty has turned into something of a loan shark, becoming a prolific lender to cash-strapped property developers. Now it seems there are signs that this new venture might be about to submerge too.

In January Sainty announced that one of the clients for its loan business, Nanjing Fudi Real Estate, was Rmb12 million in arrears. The interest repayments were incurred from a Rmb90 million loan extended in 2012 for a commercial mall in Nanjing, which the developer planned to complete by June this year.

However, as the Economic Observer reported last week, there has been no construction work at the project since last summer.

“Barred by high fences there is nobody inside. Only a single crane is left,” it noted.

Creditors – which include Sainty and local banks – are now taking action against the developer, with a real risk that Nanjing Fudi will go into liquidation.

Why is a shipmaker lending to a property developer in the first place? This type of inter-company lending, known as entrusted loans, has been one of the fastest-growing shadow banking businesses in China. A bank is usually involved as an agent of the lender, and collects a handling charge. The lender takes on the full credit risk.

Granting loans has been profitable for Sainty. In September 2012 alone, according to the Economic Observer, the ship maker extended up to Rmb248 million in entrusted loans to four local property developers, including Nanjing Fudi. The capital, due to be paid back in 12 to 18 months, carried an annual interest rate of 18%. A day before the loans were made, Sainty raised Rmb780 million selling three-year corporate bonds. Because of its state backing, the financing cost was only 6.6%.

In a circular to shareholders Sainty said that its shadow banking activities are all about “making more efficient use of idle capital”. It reported net profit of Rmb1 billion for the first three quarters of 2013, with up to 30% of earnings coming from entrusted loans.

Sainty isn’t alone in relying on lending for a sizeable chunk of its income and the 21CN Business Herald has reported that it isn’t uncommon to see firms that earn more income from entrusted loans than from their core businesses.

The value of new entrusted loans more than doubled last year to Rmb2.55 trillion from Rmb1.23 trillion. Entrusted lending has even overtaken corporate bonds as the second most popular financing activity, just behind bank loans.

But the Economic Observer wonders if Sainty’s case might be an early warning sign that a price will have to be paid by many of the firms that have taken up shadow banking. “Non-financial firms won’t be more professional than banks in judging credit worthiness,” it predicted. “And the problem is that they probably haven’t been as cautious as the banks in containing credit risk.”

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