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Chinese Banks Tied to Failed Pakistan Mill Deal

The days of easily accessible credit lines in China could be coming to an end. The Wall Street Journal (WSJ) reported that the high profile deal between the Chinese company Shandong Ruyi Science and Technology Group Co. to acquire a majority stake in the Pakistani Masood Textile Mills fell through last month because banks in the Shandong province were reluctant to lend the $62 million needed to finalize the acquisition.

At the time, analysts speculated that political instability in Islamabad was one of the reasons for the group to withdraw its offer. Analysts reported that the transaction would have brought foreign investments to Pakistan upward to $58.4 million. The deal between the Pakistan mill and Chinese group would have been a first of its kind. In addition to Pakistan’s GSP Plus status, the group would have benefited from better cotton prices and cost-effective labor in Pakistan.

The Competition Commission of Pakistan (CCP) and the Ministry of Commerce of China approved the acquisition, however, the required conditions under the Share Purchase Agreement (SPA) between the sellers and buyer had not been fulfilled within the agreed timeline. The time frame for the public offer was set to expire October 5.

Masood Textile Mill’s CEO Shahid Nazir told WSJ that Ruyi said Shandong banks were having issues with defaults. As a result, many Chinese companies are reportedly having difficulties securing funding for business. Nazir said, “When we got closer to the expiration date, we learned [that financing] had become an issue.”

Defaults are rarely publicized in China, but signs of debt woes are gradually being exposed. In particular, data from the People’s Bank of China showed that Shandong’s credit contracted in the third quarter. Overall growth in credits at banks decreased $6.6 billion from the end of June to the end of September.

Contractions like the one Shandong experienced are unusual in China, which has seen “massive expansion in credit since 2008.” WSJ reported that nonperforming loans accounted for 1.78% of loans at banks in Shandong at the end of September—significantly higher than the 1.08% level across China as a whole—and the amount of bad loans increased 44 percent from the start of the year.