China's 'real' economy wants to be neither borrower nor lender

By Pete Sweeney SHANGHAI (Reuters) - Beijing is pushing trillions of yuan into its banking system to boost business investment and arrest slowing growth, but a combination of unwilling borrowers and selective lenders is blunting its efforts. As recently as Sunday the central bank cut the amount banks must keep in reserve by a full percentage point, and it has repeatedly lowered guidance lending rates, but weak demand means businesses aren't taking the bait. A Reuters survey of listed Chinese firms showed they expect earnings growth to hit a three-year low in 2015. "We don't need new loans at the moment," said Luo Renxiang, chief financial officer of bath fixture manufacturer Yatin Bath Corp. "There are no immediate expansion plans that require fresh funding ... We're only using 70 percent of our current factory capacity in the first place," said Lou from his headquarters in Hangzhou in the coastal export powerhouse of Zhejiang province. According to Lou, his company has 1,300 workers and assets of 350 million yuan ($57 million), with 60 percent of its sales of faucets, shower stalls and sink cabinets from exports, and the rest domestic. That leaves him exposed to a real estate decline in China and weak demand overseas. His 250,000 square-metre factory, built in 2009, is short on customers, not credit, and he said interest rates were prohibitive for many who did want to borrow. "Most Chinese manufacturers have a thin profit margin, and borrowing costs are quite high. Banks charge us 5 percent more than the benchmark rates, but many smaller companies need to pay interest rates which are 20-30 percent higher ... The problem is, you don't make much profit. Many manufacturers have gross margin of only 10 percent, and mind you, that's gross margin." Such circumstances, repeated across China, mean banks are struggling to find fresh business. "From this year particularly, we've found it very difficult to lend, especially RMB lending," said a mid-level loan officer at one of China's big five state-owned banks. "It's not that we don't have funds. We do, but good borrowers are difficult to find." Frustrated officials, including Premier Li Keqiang, have begun hectoring bankers to increase lending for productive investment. Bankers say they would gladly lend to companies with collateral and decent margins, but they are being encouraged to lend to small businesses with murky books and no collateral, companies in dead-end industries looking to roll over existing debt, or a struggling real estate market. "With loan demand weak, and banks lending to an increasingly select clientele, freeing up more capital won't do much for growth -- most firms with access don't want to borrow anyway," said Leland Miller, president of China Beige Book International, which conducts a quarterly survey of Chinese companies that has repeatedly identified weak borrower demand. The first quarter Beige Book survey showed growth in capital expenditure dropping to its weakest level on record among corporate respondents. As China's export growth and industrial activity slips month after month, Beijing has attempted to stimulate investment with its cuts to reserve requirements and guidance lending rates, but the most visible result of this liquidity injection has been a speculative stock market bubble. Real lending rates have actually risen in the first quarter because of deflationary pressures caused by falling commodity prices, and banks are free to lend above the benchmark rates. ($1 = 6.2005 Chinese yuan renminbi) (Additional reporting by Samuel Shen and Engen Tham; Editing by Will Waterman)