China’s indebted firms ratchet up pressure
• -Saintyy Mar ine Corp. started small, buying and selling a few ships in the 1980s. But the stateowned Chinese company went on a debt-fuelled binge during the past few years, opening its own shipyards and signing orders worth hundreds of millions of dollars apiece.
Now, heavily indebted companies such as Sainty Marine are at the centre of the economic troubles in China that have unsettled currency, commodity and stock markets of late.
Sainty Marine just found itself in court, as one of China’s biggest banks asked to dismantle the company to recoup overdue loans. Regu- lators are investigating the accuracy of the company’s financial reports, its bank accounts have recently been frozen and its shares have not traded on the Shenzhen stock market since August.
“It’s pretty dire,” said Matthew Flynn, a Hong Kong shipping consultant.
Shipbuilding is part of a long list of Chinese industries, including steelmaking, coal mining and auto, that borrowed heavily from staterun banks to expand during the good years, helping to propel the country’s three decades of double- digit economic growth. But growth has now slipped to around seven per cent, and many firms are low on cash.
It is adding to concerns about the Chinese economy, which has made global investors nervous. Troubled companies like Sainty Marine are clouding the outlook.
For years, state- owned companies could regularly mark up their prices to help them pay their loans. As customers now pull back and deflationary pressures set in, companies are being forced to cut prices, while facing the same debt payments.
The crunch is clouding the government’s efforts to manage the economy. To keep growth from falling off a cliff, authorities are pushing a raft of stimulus measures, like building more high-speed rail lines and encouraging stateowned banks to keep lending.
But ever more borrowing leaves China vulnerable, as company blowups add to the pressures. Last year, total debts of all sorts in China — household, corporate and government — increased by an amount equal to 12 per cent of the entire country’s economy. Overall lending expanded in December at the fastest pace since June, figures released by the central bank on Friday show.
Companies in industrial sectors, which accounted for the bulk of borrowing, are navigating a treacherous environment. Low or falling prices mean that companies need to sharply increase their sales volume every year to have enough revenue to cover their debt payments. But increasing sales is hard in a slowing economy.
China is not the only country with falling producer prices. They are also down in the U.S. amid weak prices for oil and other commodities.
What makes China unusual is that companies are coping with sharply rising l abour costs. Blue- collar wages are up nearly 10 per cent a year. Overinvestment in many sectors is also resulting in too many factories and other businesses chasing the same limited sales.