Reduce the financial risks of rash investments
Some State-owned enterprises, including a large coal enterprise in Henan province, have successively issued bond default notices. A close analysis shows that they all have something in common, namely the pursuit of diversification.
The scale of China’s economic expansion is influencing the manner in which enterprises develop.
For some time in the past, Chinese enterprises mainly focused on low-end manufacturing and the service industry, treating low-cost labor as their competitive advantage, leading to insufficient competition among local enterprises and thus the formation of local monopolies.
However, due to the rapid growth of demand in the country and industrial changes, some new industries, many with low-entry thresholds, have emerged. This has motivated some enterprises to promote horizontal business expansion and engage in diversified development.
Due to government policy, corporate business diversification has been linked to the environment. Relevant measures adopted by the authorities to promote economic growth have objectively helped enterprises to more easily obtain financing and facilitated the possibility for expansion of scale through business diversification.
The reduced barriers for corporate business diversification means these enterprises often carry out excessive or rash diversified scale expansion.
Integrated development between the internet and traditional industries has also increased the motivation for many enterprises in traditional industries to make cross-sector investments.
A combination of other factors has also provided enterprises with greater impetus to engage in business diversification. For example, subsidized industrial policies and a loose industrial cycle have helped create opportunities that have prompted more enterprises to pursue business diversification.
However, such a practice is difficult to sustain and may brew a credit crisis. Although some diversified and inefficient investments have been phased out. A growing number of enterprises that have pursued diversification are facing a funds crunch and credit defaults have been on the rise.
If the country focuses on the speed and scale of development, it is easy to produce a large number of ineffective and inefficient investments. The country must shift to high-quality development to improve the marketized resources allocation mechanism and build a fair competition market environment. This will boost investment efficiency and the competitiveness of enterprises. Those enterprises with diversified businesses should consider restructuring to divest themselves of loss-making or uncompetitive businesses.