Chi­nese econ­omy strug­gling as stock mar­ket un­der­per­forms

Winnipeg Free Press - - BUSINESS / CHINA -

FIRST came the sweep­ing gov­ern­ment pro­nounce­ments. Then the flurry of ac­tions, all aimed at shoring up China’s cap­i­tal mar­kets and res­cu­ing strug­gling pri­vate com­pa­nies.

But are they work­ing?

Weeks into China’s lat­est cam­paign to sup­port the world’s worst-per­form­ing ma­jor stock mar­ket and ad­dress record de­faults, there have been some suc­cesses: equities are far less volatile and more com­pa­nies are sell­ing debt at a lower cost. An­a­lysts are not con­vinced that the ef­forts will of­fer a sus­tain­able fix for the fi­nanc­ing prob­lems that drove en­trepreneurs to­ward a cliff edge in the first place.

Here’s a look at the sup­port mea­sures that China’s gov­ern­ment, cen­tral bank and its lenders have taken in re­cent weeks to en­sure the sup­ply of liq­uid­ity in the fi­nan­cial sys­tem.

Pledged shares

China or­dered its fi­nan­cial sec­tor to ad­dress the risks as­so­ci­ated with stock-backed loans, af­ter the tum­bling equity mar­ket trig­gered a rush of mar­gin calls.

Banks were told to stop liq­ui­dat­ing pledged shares, bro­ker­ages set aside funds to help ease the fund­ing con­straints for listed firms, while in­sur­ers and mu­tual funds were called on to buy se­cu­ri­ties. Com­pa­nies are also do­ing their part af­ter reg­u­la­tors made stock buy­backs eas­ier. Lo­cal gov­ern­ments in Bei­jing, Shen­zhen and Guangzhou have pledged their sup­port.

The mea­sures have helped ar­rest the down­ward spi­ral in Chi­nese shares, though sen­ti­ment re­mains muted. More loans

China also asked large banks to in­crease their loans to pri­vate com­pa­nies to at least one-third of new lend­ing, or two-thirds for small and medium-sized banks. That’s the first time that reg­u­la­tors have given spe­cific tar­gets on pri­vate lend­ing. It’s a big ask and one that share­hold­ers re­acted badly to on Fri­day.

The con­cern is that banks will have to do too much of the heavy lift­ing, po­ten­tially leav­ing them with even more sour­ing loans on their bal­ance sheets. Credit hedg­ing

China’s cen­tral bank helped re­vive a lit­tle-used hedg­ing in­stru­ment that pro­tects cor­po­rate bond­hold­ers against de­faults, help­ing non-state com­pa­nies sell debt. The Peo­ple’s Bank of China (PBOC) said it would grant fund­ing to fi­nan­cial in­sti­tu­tions of­fer­ing such tools, trig­ger­ing a flurry of is­suance for so­called credit risk mit­i­ga­tion war­rants. Their pop­u­lar­ity has brought down bor­row­ing costs for firms like chem­i­cal pro­ducer Zhe­jiang Hengyi Group Co.

To be sure, credit spreads for junkrated bor­row­ers re­main wide. There’s still con­cern that China’s worse-thanex­pected eco­nomic slow­down will eat into cor­po­rate prof­its for the most vul­ner­a­ble com­pa­nies, an­a­lysts say. At least one in­vestor said the high yields make China’s pri­vate debt at­trac­tive. Equity tool

Signs of ini­tial suc­cesses in the bond mar­ket have prompted the cen­tral bank to study ways in which sim­i­lar tools can be brought to the stock mar­ket. The PBOC is ask­ing fi­nan­cial in­sti­tu­tions to come up with ideas, say­ing that it’s will­ing to pro­vide fund­ing to kick-start those pro­grams. There’s been no de­tail yet on how such a mea­sure would work or how much money the cen­tral bank plans to set aside to fund it.

Swap­ping debt

China’s big­gest state bank by as­sets is ex­pand­ing its bond-to-equity swap pro­gram, throw­ing a life­line to pri­vate firms that may not have the cash to meet in­ter­est obli­ga­tions or re­pay bonds at face value. In­dus­trial & Com­mer­cial Bank of China Ltd. reached ini­tial agree­ments with 50 com­pa­nies on the pro­grams, six of which have kicked off. What’s next?

While the gov­ern­ment’s quick-fix strat­egy has helped calm the panic for now, an­a­lysts at No­mura Hold­ings Inc. say China will need to do more in the com­ing months to sup­port sen­ti­ment, adding that liq­uid­ity con­di­tions re­main tight. Mak­ing mat­ters worse for China’s pri­vate sec­tor is a record amount of debt that’s due to ma­ture next quar­ter.

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