China pri­vate firms show way out of debt trap for state gi­ants

The Pak Banker - - MARKETS/SPORTS -

China's pri­vate com­pa­nies are do­ing a bet­ter job than state-owned peers cut­ting debt, new re­search shows, adding to calls for Pres­i­dent Xi Jin­ping to over­haul the coun­try's in­dus­trial sec­tor ahead of an­nual leg­isla­tive meet­ings in Bei­jing.

Pri­vate com­pa­nies have cut debt to 53 per­cent of as­sets from 58 per­cent in 2007, while SOEs have seen those fig­ures jump to 62 per­cent from 55 per­cent, ac­cord­ing to es­ti­mates from Shi Kang, an as­so­ciate eco­nom­ics pro­fes­sor at the Chi­nese Univer­sity of Hong Kong who has served as a vis­it­ing scholar at the Peo­ple's Bank of China. About 40 per­cent of bank loans to com­pa­nies go to SOEs, which only con­trib­ute to around 10 per­cent of the na­tion's eco­nomic out­put, ac­cord­ing to No­mura Hold­ings Inc.

The cen­tral bank plans to boost the amount of re­serves that must be locked away by some lenders who in­creased lend­ing too quickly, peo­ple fa­mil­iar with the mat­ter said Fri­day, af­ter the na­tion's banks ex­tended a record 2.51 tril­lion yuan ($385 bil­lion) of new loans last month. Xi is bal­anc­ing at­tempts to shore up the weak­est eco­nomic growth in a quar­ter cen­tury with pledges to lib­er­al­ize fi­nan­cial mar­kets and re­duce the role of the state ahead of the Na­tional Peo­ple's Congress in Bei­jing, where del­e­gates will sign off on a new five-year de­vel­op­ment plan.

"The Chi­nese govern­ment must cut im­plicit guar­an­tees for state-owned com­pa­nies," said Shi, lead writer of a yet-to-bepub­lished re­search pa­per ti­tled "Ex­cess Liq­uid­ity and Credit Mis­al­lo­ca­tion: Ev­i­dence from China." "With that re­moved, lenders will no longer treat SOEs fa­vor­ably. SOEs have to re­duce over­ca­pac­ity and zom­bie com­pa­nies must die."

China will seek to chan­nel more pri­vate in­vest­ment into bloated state firms as it aims to carry out the most sweep­ing over­haul of the com­pa­nies that dom­i­nate the $10 tril­lion econ­omy in two decades. The plan aims to re­form "zom­bie en­ter­prises," while en­cour­ag­ing a "blend­ing" be­tween state and pri­vate cap­i­tal, govern­ment agen­cies over­see­ing the plan said in state­ments in Septem­ber.

Re­search by Bloomberg In­tel­li­gence last year showed that China could have achieved eco­nomic growth ex­ceed­ing 8 per­cent in the first half of 2015 had the na­tion's bloated and in­ef­fi­cient sta­te­owned en­ter­prises kept pace with pri­vate firms. Debt at state firms bal­looned fol­low­ing govern­ment stim­u­lus spend­ing af­ter the global fi­nan­cial cri­sis. China's ra­tio of over­all debt to its eco­nomic size will likely climb for at least an­other four years, ac­cord­ing to a Bloomberg News sur­vey, un­der­scor­ing the risks fac­ing pol­icy mak­ers as they strive to pre­vent a deeper slow­down with­out trig­ger­ing a credit blowout.

Now, the cool­ing econ­omy is com­pli­cat­ing ef­forts to rein in obli­ga­tions. The rul­ing Com­mu­nist Party wants to main­tain an an­nual ex­pan­sion of at least 6.5 per­cent through 2020, af­ter growth fell to 6.9 per­cent last year. The na­tion's top plan­ning agency is again mak­ing more money avail­able to lo­cal gov­ern­ments to fund in­fra­struc­ture projects.

"The higher lev­er­age at SOEs will hurt eco­nomic ef­fi­ciency and long-term growth," said Zhao Yang, the Hong Kong­based chief China econ­o­mist at No­mura. "They care less about the long-term risk com­pared to pri­vate busi­nesses be­cause SOE chiefs come and go. Pri­vate com­pa­nies are more cau­tious in tak­ing out debt and they have started to delever."

Re­form of SOEs is pro­gress­ing slowly at the lo­cal-govern­ment level and, based on the cur­rent trends, Stan­dard & Poor's ex­pects more down­grades on those com­pa­nies over the next 12 months, the rat­ing firm wrote in a Feb. 16 note. Bil­lion­aire in­vestor Bill Gross called China's credit ex­pan­sion "un­sus­tain­able" in a Twit­ter post Thurs­day.

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