A source from a bank’s credit department told reporters that the Central Economic Work Conference identified capacity reduction as a key task for 2016. At the same time, non-performing loans remain particularly high in these sectors. “The head office has long since imposed controls on the overall financing scale. The companies with high levels of non-performing loans all suffer from overcapacity—this can be described as the result of a resonance between these two factors.”

The reporter exclusively learned that early on the 21st, a joint-stock bank issued a notice classifying steel, coal, and nonferrous metal smelting as industries slated for reduction and exit, while also implementing different management strategies for existing clients in these industries.

The notice indicates that the industries listed by the bank for reduction and exit include: Iron and steel, smelting and rolling of common nonferrous metals, electrolytic aluminum, cement, flat glass, shipbuilding, shipping, coal, coke production, coal chemical industry, photovoltaic manufacturing, construction machinery, textile and chemical fiber, papermaking, basic chemicals, fertilizer production, steel trading, coal, and mining and beneficiation of common metal ores. Including 19 industries and four high-risk sub-sectors within the construction industry (residential construction, industrial and mining engineering construction, architectural decoration, and building installation).

“For existing customers meeting the admission criteria who apply to increase their credit lines and renew their loans, approval from the head office is required. For customers not meeting the admission criteria, the outstanding exposure for any single account must not be increased compared to the end of 2015. Except in exceptional circumstances that have been approved on a case-by-case basis by the head office, no new exposures are permitted under any other circumstances,” an insider at this joint-stock bank told reporters. The notice stipulates that for existing customers meeting the admission criteria, total exposure will be subject to overall control, using the risk exposure as of the end of 2015 as the baseline.

Not surprisingly, recently a major state-owned bank also issued a clear notice suspending the acceptance discounting business for three sectors: iron ore, steel trading, and coal. According to what our reporter has learned, since 2012, this bank has been requiring its branches to closely monitor and control credit risks in the steel trading sector, strictly limiting new loan approvals. An employee from the bank’s provincial branch told our reporter, “The bank has long since stopped making new loans in these sectors and no longer approves new steel trading enterprises.”

“Loans are mostly extended by joint-stock banks or local city commercial banks—yet the credit lines are small, and there are numerous additional conditions attached, effectively driving up financial costs. Even so, since August last year, we’ve been unable to secure any new loans,” a senior executive from a steel trading company in Lianyungang told our reporter. Industries suffering from overcapacity are being hit hard by policy restrictions, and banks as a whole are pessimistic about these sectors. The Big Four state-owned banks have shown absolutely no interest in extending loans, while even the threshold for joint-stock banks and city commercial banks is prohibitively high.

A source familiar with the banking sector said that the trend of withdrawing from the steel industry had already begun when Zhonggang defaulted. Basically, these industries have little cash flow—everything is just a back-and-forth of banker’s acceptances. Right now, most of the focus is on small businesses, which are receiving strong support from the central government. “The number of small businesses is supposed to grow every year, but given the current economic climate, the growth target isn’t very high.”

Since the beginning of this year, banks have further strengthened their financing management for industries such as steel trading. The aforementioned state-owned major bank issued a document requiring that all types of financing—including on-balance-sheet loans, off-balance-sheet financing, and other financial asset services—be subject to strict control: “Approvals for new transactions will be suspended if they haven’t been approved yet; signing of new contracts will be suspended for those already approved but not yet signed; and withdrawals will be suspended for those already contracted but with no funds withdrawn yet.”

A source from the bank’s credit department told reporters that the issuance of this document was driven both by the intention to align with the nation’s regulatory efforts—specifically, the Central Economic Work Conference identified capacity reduction as a key task for 2016—and by the high levels of non-performing loans in these sectors. “The head office has long since imposed controls on the overall financing scale. The companies with high non-performing loan rates all suffer from overcapacity; in fact, this is the result of the combined effect of these two factors.”

The aforementioned individuals told reporters that, due to the large number of non-performing assets, key efforts this year have been focused on collecting and resolving non-performing loans.

From the bank’s perspective, the situation is highly paradoxical. On the one hand, banks recognize the high level of industry risks and the elevated rate of non-performing loans; yet on the other hand, they dare not easily pull back their loans—they must continue to extend credit to these borrowers. Since 2012, banks have been actively managing risks in these sectors, imposing stringent requirements on which types of enterprises are eligible for financing. Starting in 2013, the state launched a tough crackdown on overcapacity. By November 2015, the country had entered a period of supply-side reform aimed at weeding out “zombie enterprises,” making the problem of overcapacity even more severe.