* Yangtze region powered China's growth during boom years
* Now YRD accounts for a third of all non-performing loans
* Struggling textile firm highlights changed fortunes
* Factories battered by falling prices, rising costs
By Gabriel Wildau
SUZHOU, China, April 15 Suzhou, an ancient city
in Jiangsu province 100 km (60 miles) west of Shanghai, lives in
legend as one of China's most beautiful, famous for its elegant
gardens and charming canals.
More recently, it became an industrial powerhouse, sitting
at the heart of the Yangtze River Delta region that, along with
the Pearl River Delta in Guangdong, drove China's economic boom.
Now it is ground zero for a painful corporate de-leveraging
that has tacit government approval. One third of all loan
delinquencies come from the region, and credit is getting harder
to come by.
"The more banks do this, the more they promote a vicious
cycle, and companies are even less able or willing to repay
their loans," said Zhou Dewen, vice chairman of the China
Association of Small and Medium Enterprises.
The Yangtze River Delta (YRD) covers the financial capital
of Shanghai and the eastern provinces of Zhejiang and Jiangsu.
In 2012, it accounted for half of China's exports and attracted
57 percent of its foreign direct investment.
The outsized role of small, private firms, their savvy
entrepreneurs and the vibrant underground financing networks
that supported them have been a source of strength for the YRD.
But now it may be a vulnerability as the government shows it
is prepared to let companies fail -- at least private ones.
Among the six largest domestic banks that classify their
non-performing loans geographically, this region accounts for
one-third of their bad debts.
"The YRD's economy has been pretty seriously battered. Risks
are multiplying," said a risk-management executive at a
mid-sized bank in Shanghai.
Economists say a series of isolated defaults would be mostly
positive in the long run for China, by improving risk pricing
and the efficient allocation of capital.
But there is a risk that defaults could trigger a chain
reaction of credit problems that has the potential to
destabilise China's financial system, similar to the way global
markets froze after the collapse of Lehman Brothers in 2008.
The region can already claim China's first domestic bond
default, after Shanghai Chaori Solar Energy Science and
Technology Co Ltd missed a bond interest payment last month.
Last week, a synthetic yarn-maker in Zhejiang declared
bankruptcy, raising the prospect of default. That firm's bond
carries a guarantee from another textile company, highlighting
linkages between firms that some worry can amplify risks.
The government's hands-off approach is a clear shift from
its bailouts of the past -- including of Chaori, which in 2013
received assistance from a district government in Shanghai that
enabled it to make a coupon payment.
BOOM AND BUST IN SUZHOU
There are still some traditional white stucco houses with
red-tiled roofs along the east bank of the Jinghang Canal, which
runs from central Suzhou to the once-thriving textile hub of
Wujiang, but only in patches between factories and construction
"Prices for raw materials are going up, but for finished
goods they're going down. The room for profit is smaller and
smaller," said Zhu Dongyang, a sales manager at Wujiang City
Pinxin Textile Technology Co Ltd.
China's producer price index has fallen in annual terms for
the past 25 months, while data this week is forecast to show
economic growth at its slowest early 2009.
Then the government unleashed massive stimulus to shore up
the economy. Now, it says there will be no repeat, in part to
avoid worsening problems of overcapacity and debt.
Jiangsu Xinmin Textile Science & Technology Co Ltd
, based in Wujiang, was one of the many firms that
expanded rapidly during the heady years of China's credit-fueled
economic stimulus from 2008 to 2010.
There are few obvious signs of distress outside its factory.
Motorised tricycles piled high with fabric pass by regularly.
But last month, the company warned it may be de-listed from the
Shenzhen exchange after reporting a second straight annual loss.
As industry overcapacity and falling prices forced it to
write down its assets, equity fell from 1.1 billion yuan ($177
million) at the end of 2011 to 441 million at the end-2013.
The firm has 316 million yuan in loans coming due in 2014.
Its current ratio -- which measures cash and other short-term
assets against liabilities due within 12 months -- was 0.57 at
end-2013, suggesting it will need to raise more funds to meet
As a relatively large listed firm, Jiangsu Xinmin has some
access to bank credit. Many smaller producers are forced to tap
the shadow banking system, where interest rates can be punitive.
The benchmark annual rate for a three-month private loan in
Wenzhou, known as China's informal lending hub, reached 18.7
percent last Thursday, according data from the
Wenzhou Private Lending Service Centre.
Jiangsu Xinmin declined to answer questions about its
financial condition. The board secretary said that firms
classified as "special treatment" - the designation that China's
stock exchanges assign to companies under consideration for
de-listing -- aren't permitted to do media interviews.
Private companies in the YRD control 28 percent of assets
held by industrial firms, compared to a national rate of 19
percent, according to Reuters calculations based on official
data. The true ratio in the YRD is likely higher, since official
figures only cover firms with annual operating revenue above 20
"Some specific industries bring risk," said Xu Chengming,
professor at Nanjing University of Finance and Economics,
located in Jiangsu's provincial capital.
Xu said solar panels and steel were the biggest sources of
non-performing loans in Jiangsu. The channelling of funds into
speculative investments, such as real estate, has further
Not surprisingly, Jiangsu was the first local government to
establish its own bad-loan asset management company, modelled on
the asset managers that Beijing used to clean up the balance
sheets of the country's four biggest banks, followed by
Zhejiang and Shanghai.
Most analysts think bad loans, both in the YRD and
nationally, are higher than official figures indicate, as banks
can extend overdue loans and use other techniques to disguise
"These are China's most developed places. The most developed
places are growing the slowest," said Zhu Tian, chair of the
economics department at China Europe International Business
School in Shanghai.
"If growth is slowing, you are going though some kind of
transition, and some low value-added industries will have to
($1 = 6.2113 Chinese Yuan)
(Additional reporting by Koh Gui Qing, Xiaoyi Shao and Shanghai
Newsroom; Editing by John Mair)