Re­struc­tur­ing sec­tors will help cut over­ca­pac­ity and boost prices

China Daily (Hong Kong) - - BUSINESS - By MENG FANBIN meng­fan­bin@chi­

Rad­i­cal re­form of the coal and steel in­dus­tries has cut over­ca­pac­ity and re­duced debt lev­els among State-owned en­ter­prises.

A re­search re­port from GF Se­cu­ri­ties Co Ltd showed that repack­ing debt into eq­uity and pro­mot­ing poli­cies to re­vamp the sup­ply chain are help­ing to trans­form the sec­tors.

“The deals will not only re­duce their lever­age ra­tio and fi­nan­cial pres­sure, but also fa­cil­i­tate their in­dus­trial trans­for­ma­tion and up­grad­ing,” the re­port stated,

The re­forms in the coal and steel sec­tors will also make th­ese SOEs leaner and more able to adapt to a high-tech world.

This in turn will cut over­sup­ply and sta­bi­lize prices within the in­dus­tries, and make th­ese sprawl­ing com­pa­nies more com­pet­i­tive.

“Out­put re­duc­tion will lead to a rise in prices and com­pany prof­its,” said Yao Yang, an an­a­lyst at Shen­wan Hongyuan Se­cu­ri­ties.

“This will lay a solid foun­da­tion for the im­ple­men­ta­tion of the debt-to-eq­uity swap deals.”

Over­ca­pac­ity in the coal and steel in­dus­tries has been dras­ti­cally re­duced in the first part of this year.

Statis­tics from the Na­tional De­vel­op­ment and Re­form Com­mis­sion showed that in the first five months of 2017, 42.39 mil­lion tons of steel ca­pac­ity had been cut, reach­ing 84.8 per­cent of the an­nual tar­get re­duc­tion. Fig­ures also re­vealed that 111 mil­lion tons of coal was left in the ground dur­ing the first six months.

This was 74 per­cent of the an­nual tar­get re­duc­tion for the fos­sil fuel in China.

“But there is no need to im­ple­ment large-scale coal re­duc­tion mea­sures later in 2017,” said an of­fi­cial from NDRC, im­ply­ing that coal prices are now at a rea­son­able level.

Ear­lier this year, com­pa­nies in the largest coal pro­duc­ing prov­ince of Shanxi in North China rolled out debt-to-eq­uity swaps.

The Lu’an Min­ing In­dus­try Group signed debt-to-eq­uity swap agree­ments with the lo­cal State-as­set reg­u­la­tor and China Con­struc­tion Bank Corp worth 20 bil­lion yuan ($3 bil­lion) in March.

In May, Shanxi Cok­ing Coal Group Co Ltd signed the first mar­ket-ori­ented debt-to-eq­uity project, worth 2 bil­lion yuan, with the China Con­struc­tion Bank branch in the prov­ince.

“As cycli­cal in­dus­tries, high debt ra­tios bring huge pres­sure to en­ter­prises,” the GF Se­cu­ri­ties re­port stated. “So, it is ur­gent for them to re­duce the as­set-li­a­bil­ity ra­tio.”

In March, the China Iron and Steel As­so­ci­a­tion, or CISA, an­nounced it was also work­ing on bring­ing down its debt lev­els.

The plan will be to re­duce its as­set-li­a­bil­ity ra­tio to be­low 60 per­cent in the next three to five years, ac­cord­ing to Liu Zhen­jiang, gen­eral sec­re­tary of CISA.

“So far, 10 steel com­pa­nies, in­clud­ing China Baowu Steel Group Corp Ltd, have signed debt-to-eq­uity swaps with banks,” Liu said. “The China Bank­ing Reg­u­la­tory Com­mis­sion will bring to­gether re­lated fi­nan­cial in­sti­tu­tions and typ­i­cal steel en­ter­prises to im­ple­ment rel­e­vant is­sues in the near fu­ture.”

The steel in­dus­try should also ac­cel­er­ate its debt-shed­ding pol­icy in an ef­fort to fi­nally get to grips with the prob­lem, Luo Tiejun, a se­nior of­fi­cial from Min­istry of In­dus­try and In­for­ma­tion Tech­nol­ogy, pointed out.

“Last year, the av­er­age in­dus­try debt ra­tio was brought down by only one per­cent­age point,” Luo said.

In the first quar­ter of this year, the av­er­age as­set-li­a­bil­ity ra­tio for CISA mem­bers was al­most 70 per­cent, Gu Jian­guo, vice-pres­i­dent of the as­so­ci­a­tion, said at a news con­fer­ence in April.

In ad­di­tion, Yao of Shen­wan Hongyuan Se­cu­ri­ties, stressed that debt-to-eq­uity swaps can lower the fig­ures on pa­per, but they had lim­ited im­pact in re­duc­ing the real debt bur­den.

The Fifth Na­tional Fi­nan­cial Work Con­fer­ence made it clear that delever­ag­ing SOEs was one of the pri­or­i­ties to pre­vent fi­nan­cial risks in China.

At the end of the first quar­ter, the debt ra­tio of non-fi­nan­cial com­pa­nies jumped to 157.7 per­cent from 155.1 per­cent in the fi­nal three months of 2016, ac­cord­ing to the Na­tional In­sti­tu­tion for Fi­nance & De­vel­op­ment.

Since the global fi­nan­cial cri­sis in 2009, China’s cor­po­rate debt has con­tin­ued to ac­cu­mu­late. By the end of last Septem­ber, li­a­bil­i­ties in the non-fi­nan­cial sec­tor hit $28 tril­lion, which was about 250 per­cent of nom­i­nal GDP.

So far, 10 steel com­pa­nies have signed debt-toe­quity swaps with banks.” Liu Zhen­jiang, gen­eral sec­re­tary of CISA


A worker cleans a steel lendle at the Dong­bei Spe­cial Steel Group in Dalian, Liaon­ing prov­ince.

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