China: Cash crunch hurts textile firms

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Private Chinese firms are braced for another wave of funding difficulties as banks hoard cash to meet regulatory requirements at the end of the year. At least 40 textile companies in East China's Jiangsu and Zhejiang provinces have disappeared in the past six months, most likely the result of failure to secure funding for their debts, according to officials of the China National Textile and Apparel Council.

The official added that another large textile firm went under earlier this month, leaving behind 600 million yuan in outstanding debt. "Most of these textile firms ask each other to guarantee loan repayments. If one of them goes under, it will take everybody else down as well," said a textile business owner in Zhejiang.

The latest cash squeeze comes as the People's Bank of China, the central bank, said the banking system has excess cash reserves of 1.5 trillion yuan. Small and medium banks are the major lenders to private business, but they are not as competent in attracting household deposits as the large state lenders. Much of their funds come from interbank market, where banks lend to each other in the short term.

The sudden rise in the cost of interbank funds over the past week underscores the difficulties for banks at the end of the year. It is small firms who suffer the collateral damage of the cash crunch Research by global credit rating agency Moody's, found that total borrowing in the Chinese mainland's non-financial private sector in the fiscal year that ended in October, is likely to equal 180 percent of the whole national economic output in the same period. The scramble for cash by highly leveraged firms to repay loans will become more frequent in the near future.

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