Shanghai, Jul. 6 (Reuters) - A growing number of Chinese banks have agreed to resume lending to some of the country's steel traders after the cash-strapped firms made a joint appeal to banks earlier last month, industry sources said on Friday.
Chinese banks had clamped down on new lending to steel traders since April after the country's regulator warned of rampant illicit borrowing to speculate in other sectors such as property and stocks.
The shortage of funds, along with an uncertain demand outlook, triggered a 4.6 percent monthly fall in Shanghai rebar prices in May - the sharpest since November 2011.
However, the resumption of loans will only give marginal support to domestic steel prices, as improved access to loans has been largely limited to established trading houses, with bank sources saying they remain cautious about lesser known firms that could still use funds for riskier asset investments.
"We have been in talks with some banks recently and they have agreed to keep the credit lines open and reduce their lending rates," Zhou Huarui, who heads the Shanghai Steel Service Trade Association, a lobby group for traders, recently said at a traders' gathering.
China Citic Bank has agreed to reduce lending rates to steel traders to 10 percent from a high of 35 percent on June 1, Zhou said, while China's Minsheng Bank will also reduce borrowing rates by over 2 percentage points.
Still, bank sources said they would be careful in picking clients.
"We will continue to lend money to a selected group of steel traders, for example, those who have stable business with Baosteel or those who stick to steel trading as a core business," said a senior manager with Huaxia Bank's Baoshan branch.
Traders said the increase in loans and Beijing's efforts to pump up infrastructure spending will only be a short-term reprieve for steel middlemen, with many likely to go out of business due to tepid demand, a major supply glut, razor-thin margins and increasing bad debt.
"Most steel traders lost 50-150 yuan ($7-23.60) per tonne over the past few months ... banks in Jiangsu and Anhui provinces have continued to shut off loans to traders from Fujian province," said a trader in Wuxi city, Jiangsu province.
"It's also more difficult than before for traders to collect payment from buyers," he added.
Industry data showed that China's medium- and large-sized steel mills saw their total profit dropping 22 percent to 1.4 billion yuan in May.