China to stop credit to re­bal­ance econ­omy

Weekend Argus (Saturday Edition) - - BUSINESS -

BEI­JING: China said yes­ter­day it would cut off credit to force con­sol­i­da­tion in in­dus­tries plagued by over­ca­pac­ity as it seeks to end the econ­omy’s de­pen­dence on ex­trav­a­gant in­vest­ment funded by cheap debt.

In a state­ment from the State Coun­cil, or cabi­net, Bei­jing laid out broad plans to en­sure banks sup­port the kind of eco­nomic re­bal­anc­ing China’s new lead­er­ship wants as it looks to fo­cus more on high-end man­u­fac­tur­ing.

Pres­i­dent Xi Jin­ping and Pre­mier Li Ke­qiang have flagged for some time that the rapid growth of the past three decades needs to shift down a gear, and an­a­lysts said yes­ter­day’s an­nounce­ment was a sig­nal that they in­tended to press on with re­forms de­spite ev­i­dence of a sharper- thanex­pected slow­down.

“The guide­line shows China’s pol­i­cy­mak­ers will fo­cus more on eco­nomic re­struc­tur­ing to sta­bilise the econ­omy, rather than pro­vid­ing more liq­uid­ity to sup­port eco­nomic growth,” said Li Huiy­ong, an econ­o­mist at Shenyin Wan­guo Se­cu­ri­ties in Shang­hai. The slow­down in the world’s sec­ond- largest econ­omy has started to put pres­sure on some busi­nesses.

Yes­ter­day, China Rong­sheng Heavy In­dus­tries Group, China’s largest pri­vate ship­builder, ap­pealed for fi­nan­cial help from the govern­ment and big share­hold­ers, af­ter cut­ting its work­force and de­lay­ing pay­ments to sup­pli­ers.

An­a­lysts said the com­pany could be the big­gest ca­su­alty of a lo­cal ship­build­ing in­dus­try suf­fer­ing from over­ca­pac­ity and shrink­ing or­ders amid a global ship­ping down­turn. New ship or­ders for Chi­nese builders fell by about half last year.

The State Coun­cil said it would en­sure credit kept flow­ing to busi­nesses that it thought had com­pet­i­tive prod- ucts, but it would work with banks to over­see a grad­ual wind­ing down of other busi­nesses.

“The govern­ment will adopt dif­fer­en­ti­ated poli­cies based on the var­ied sit­u­a­tions in the in­dus­tries plagued by over­ca­pac­ity,” it said.

It did not men­tion any spe­cific in­dus­tries or com­pa­nies and there was no sug­ges­tion it was re­fer­ring to Rong­sheng.

Fri­day’s an­nounce­ment was the lat­est sign that China’s pol­i­cy­mak­ers are de­ter­mined to bring debt-fu­elled ex­pan­sion un­der con­trol, af­ter the cen­tral bank al­lowed a cash crunch last month that sent short-term lend­ing rates to record highs.

Ma Tao, an an­a­lyst with CEBM Group, an in­sti­tu­tional in­vest­ment re­search firm in Shang­hai, said sec­tors such as con­struc­tion ma­te­ri­als, steel and alu­minium suf­fered from over­ca­pac­ity, as well as high debt and fi­nanc­ing costs.

“The re­cent credit crunch also served as a cat­a­lyst for their cash flow prob­lems to emerge, as liq­uid­ity has not been eased,” said Ma.

The State Coun­cil also said that, in fu­ture, so-called wealth man­age­ment prod­ucts is­sued by banks would have to be linked to spe­cific projects, rather than be­ing mixed to­gether with banks’ other pools of credit.

Such a move would pre­vent some of the riskier lend­ing prac­tices in the shadow bank­ing mar­ket that the cen­tral bank has been try­ing to ad­dress.

Ex­plo­sive credit growth, par­tic­u­larly in the opaque shadow bank­ing sys­tem, is seen by an­a­lysts as one of the big­gest risks to China’s econ­omy, along with a frothy prop­erty mar­ket and the run-up of debt by lo­cal gov­ern­ments.

Un­der­lin­ing the last of those risks, a se­nior of­fi­cial said yes­ter­day that the govern­ment did not know pre­cisely the ex­tent of lo­cal gov­ern­ments’ debt, and warned that it could be more than pre­vi­ous es­ti­mates.

Es­ti­mates of lo­cal govern­ment debt range from Stan­dard Char­tered’s 15 per­cent of the coun­try’s GDP at end-2012 to Credit Suisse’s 36 per­cent. Fitch put the fig­ure at 25 per­cent when it down­graded China’s sov­er­eign debt rat­ing in April.

Fi­nance vice-min­is­ter Zhu Guangyao said China had not re­leased of­fi­cial fig­ures since a 2010 au­dit­ing re­port that put lo­cal govern­ment debt at 10.7 tril­lion yuan.

“Cur­rently, (ac­cord­ing to) na­tion­wide sur­veys, I think this num­ber will rise,” Zhu said, de­fend­ing the debt as mostly geared to­ward fu­elling in­fra­struc­ture projects. – Reuters

PIC­TURE: REUTERS

SOS: China Rong­sheng Heavy In­dus­tries Group, China’s largest pri­vate ship­builder, said yes­ter­day it had sought fi­nan­cial help from the Chi­nese govern­ment and big share­hold­ers af­ter lay­ing off some work­ers and de­lay­ing pay­ments to sup­pli­ers.

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