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China

Special Report - Opportunity and Risk in China - Investment concerns - New Financing rules take their toll

New policies designed to stem inflation in China are combining with the impact of the global credit crunch to make life increasingly difficult for many in the country's wind industry. Changes in the bank financing rules means it is harder for some developers to secure finance as quickly as in the past. "It has been a really rough year for developers to get investment for solid business plans, particularly those using the independent developer model," says Sebastian Meyer of Azure International. "I have seen a number of ventures with reasonable business plans trying to get equity investment which have not achieved their aims."

"Some manufacturers have nacelles piling up in their lots waiting for their customers to scramble to make new arrangements for finance," says Steve Sawyer of the Global Wind Energy Council. Turbine suppliers have been particularly hit, with clients that have placed orders finding they can no longer make payments on schedule because expected bank loans have yet to be approved. Suzlon is one such supplier. "This situation is a continuing source of concern," says the company's Paulo Soares. "There have been improvements lately, but we are still far from an acceptable situation."

The problem took hold in June, when as part of its anti-inflation policy, China's central bank announced that the commercial bank reserve requirement ratio (RRR) - the percentage of deposits a bank must hold in reserve - was being increased to 17.5%. This is up from 10% in the first quarter of 2007 and 7.5% in 2006. The decision effectively put a freeze on CNY 400 billion ($57.8 billion) in the banking system. The result is the government has removed CNY 3 trillion from the system in a year, says Soares. In addition, the lending ability of general banks has been stemmed, with quarterly limits imposed by the central bank. Combined with the problems in the global credit market, the impact has been significant.

Dollar crunch

There has been a "drastic liquidity change since late 2007," says Soares. "This has been especially driven by US liquidity issues, because China's central bank requires all the reserve by banks to be made in US dollars." Bank funding costs are much higher than 2007 and inter-bank rates are likely to keep rising due to tightening liquidity, he says. Banks are more cautious, which "makes financing difficult for the developers and delays the project."

That China's big utilities are also the leading wind developers is no help. Their profits are already being squeezed as coal prices surge, while prices paid by consumers for electricity are kept unchanged. In the first half of 2008, the big five state utilities posted a net loss of some CNY 7 billion ($1 billion), notes Soares. Developers must prioritise investments," he continues. "Since wind has no impact in the current power generating mix and coal is what drives power production, the wind business is the first to suffer with lack of financial resources. This is a problem that affects all wind business, not only turbine suppliers."

Meyer agrees, but thinks an enforced slow down in the pace of development could actually be of benefit. "These changes do give some sense of stability. Companies just know they are on a list. It is a way of slowing down the plans of developers. That is not necessarily a bad thing," he says.

Until now, the market in China was typically characterised by on-balance-sheet lending, so project finance has effectively been a refinancing of existing project deals with existing customers. "But to be clear, to date, or certainly up to the beginning of 2008, all debt that has been used to finance the wind capacity installed was secured without a power purchase agreement," he says. "Now banks are likely to require them."

The bank rule changes could, he says, be seen as a positive indicator of maturity in China's financial market. "Yes, the environment is forcing some delays, but those delays should, in the long term, be a positive development. It should result in international standard due diligence practices being conducted, with full risk factors examined and so forth," he insists. "This should result in improved quality of projects and thus it means then the capital market is doing what it should be doing."Article by Gail Rajgor, Senior Editor.

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