by Bloomberg 18
Feb 2020 by Anjani Trivedi
Beijing is throwing all it’s got at the
coronavirus. Less visible than the drama of quarantining communities, however,
is the new pressure that the outbreak is bringing on China Inc.’s
hard-up borrowers.
They face $944 billion of debt maturities
onshore and $90 billion offshore this year. Authorities are going back to
their old playbook of spewing handouts to get them through. The costs
will add billions of dollars of debt and cripple
an already-weakened financial system. It may be doing more harm than
good.
Workers are stranded and factories
remain widely shut. There is no imminent sign of that changing, even
if the increase in infections has trended downward in recent days. The
resulting economic slowdown will bite into earnings by 10% to 20% for months and
hamper the ability of companies to pay their debts. As asset quality
deteriorates, Goldman Sachs Group Inc. estimates that Chinese banks’
implied ratio of bad-to-total loans will jump to 8.1% from an earlier
prediction of 5.4%.
China has responded with all-too-familiar
palliatives. Regulators and local governments have laid out measures that
include billions of dollars for tax cuts, borrowings at cheaper
rates, and incentives to keep workers employed. Banks are being asked to push
off repayments and to roll over debts. They’re allowing companies to add
more working capital loans before they have paid down existing ones.
Trouble is, China Inc. was already
struggling before the virus hit, especially the private sector.
A stimulus campaign to pull manufacturers out of the trade-war
doldrums didn’t do much for their balance sheets last year. Private companies’
accounts receivables remain elevated and have been increasing for the
likes of large machinery makers. Short-term funding and average payback periods
are also rising. Financing for capital expenditures and working
capital slowed into the end of last year.
A recent survey of 995 small- and
medium-size companies showed that a just over a third could survive for a
month with their current savings. Another third could hang on for two
months, while just under 18% could last three. All this as large
banks reported a more than 30% increase in loans to smaller borrowers in
the first half of 2019.
Beijing’s latest round of financial forbearance
will only worsen the situation. Lending more with looser terms may help
tide over some companies and refinance their debt for now, but does little
to flush out the ones that just aren’t financially viable. That many
cannot support themselves without the state for even three months shows
China’s vulnerabilities.
Lenders, the pillars of the financial
system, are weaker than the numbers betray. The central bank’s stress
tests show as much. Before the virus, they were contending with a
bank failure and a deleveraging campaign that unearthed billions
of dollars of bad credit assets. Government coffers, meanwhile, are
shrinking. All of the state’s largesse has meant fiscal revenue
growth slowed to 3.8% last year, well under its 5% target and down almost half
from 6.8% in 2018.
In theory, Beijing has the tools and a vast
number of financial institutions aside from banks to lean on. In times of
crises, financial forbearance isn’t unheard of. But repeated use of banks
this way multiplies the dangers to unsustainable levels. Small and
medium enterprises facing funding issues have to reach for more shadowy
financing. The private sector is cash-starved and debt
piles up. That debt, as the deleveraging campaign has shown, clogs
the system and makes every yuan of credit even more
ineffective. Companies can’t grow and lenders start to fail. The state is
left holding the bag.
A more prudent approach this time might be call
into service insurance companies with huge balance sheets, and asset
management companies, with their experience in dealing with stressed companies.
Insurers have been big buyers of bonds, stocks and private equity deals
for years. As operators in a marketplace, they understand credit risk
better than banks. They could be more effective in managing small and medium
companies’ debts.
It’s time to let weak companies that have high operating leverage and short-term debts close down. But that might be too risky for President Xi Jinping, who continues to voice support for them. After all, they account for around 80% of urban employment.
It’s time to let weak companies that have high operating leverage and short-term debts close down. But that might be too risky for President Xi Jinping, who continues to voice support for them. After all, they account for around 80% of urban employment.
When China dealt with Severe Acute
Respiratory Syndrome in 2003, an era of supercharged growth was beginning. It
had recently joined the World Trade Organisation and even indebted
companies had cash flowing in and the prospect of a lot more coming.
That’s no longer the case.
Even if Beijing manages to rein in the coronavirus, debt will keep sickening China Inc.
Even if Beijing manages to rein in the coronavirus, debt will keep sickening China Inc.
Copyright Bloomberg News
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