A northern Chinese powerhouse grapples with a slowdown as credit curbs hit

Some state firms are defaulting or scrambling for funds to meet obligations and some lenders are refusing to lend to Tianjin companies, according to creditors, government sources and documents viewed by Reuters. 

In the city’s sprawling new business district - once billed as China’s answer to Manhattan, now slightly more modestly as its Canary Wharf - many skyscrapers stand unfinished or empty. 

With an economy the size of Vietnam’s, Tianjin’s troubles will be a high-profile test of President Xi Jinping’s commitment to pivot China’s economy away from a credit-fueled growth model. The city sits on the coast, on Beijing’s doorstep, just a 30-minute high-speed train ride away.

Tianjin’s problems also reflect growing strains on China’s economy as curbs on pollution, local government debt and shadow financing hit home. On Thursday, China said investment growth in May grew at the slowest rate in more than 22 years. Tianjin’s state-owned firms have been particularly hard hit by Beijing’s efforts to rein in risky lending and curb bad debts by closing off shadow financing channels such as trusts, among other measures.

Their plight is compounded by the deteriorating finances of the Tianjin government as property speculation curbs cool the city’s real estate market, government sources said. A major state bank recently prohibited its Tianjin branch from making new loans to the city, according to a source with direct knowledge. The source declined to name the bank due to the sensitivity of the matter.

A trust firm with outstanding loans to state companies in Tianjin has made a similar decision due to fears of rising default risks, according to a source at the company. “We are not making any new loans to Tianjin,” the source said, adding that the trust firm believed some state companies had “given up” on timely repayment of debts. Zhiwei Zhang, chief economist for China at Deutsche Bank, said local governments like Tianjin had faced relentless pressure to tighten fiscal policies.

“It has been building up and we expected some events like this to happen this year,” Zhang said. “The pressure is on, the pressure is persistent.” 

In the past two months, CITIC Trust and Guotong Trust have issued warnings about the debt repayment abilities of Tianjin state conglomerates like Tianjin Municipal Development Co and Tianjin Real Estate. 

Both companies invested in large debt-financed projects in Tianjin as part of the local government’s drive to boost economic growth. In recent years, Tianjin has been reshaped with a spate of high-profile construction projects like the Binhai New Area, a vast development that includes finance and high-tech zones, a new futuristic library that went viral online when it opened last year, as well as some of the tallest skyscrapers in China.

The city also hosts meetings of the World Economic Forum every two years in an enormous convention center on the outskirts of town.