Chinese economy struggling as stock market underperforms
FIRST came the sweeping government pronouncements. Then the flurry of actions, all aimed at shoring up China’s capital markets and rescuing struggling private companies.
But are they working?
Weeks into China’s latest campaign to support the world’s worst-performing major stock market and address record defaults, there have been some successes: equities are far less volatile and more companies are selling debt at a lower cost. Analysts are not convinced that the efforts will offer a sustainable fix for the financing problems that drove entrepreneurs toward a cliff edge in the first place.
Here’s a look at the support measures that China’s government, central bank and its lenders have taken in recent weeks to ensure the supply of liquidity in the financial system.
China ordered its financial sector to address the risks associated with stock-backed loans, after the tumbling equity market triggered a rush of margin calls.
Banks were told to stop liquidating pledged shares, brokerages set aside funds to help ease the funding constraints for listed firms, while insurers and mutual funds were called on to buy securities. Companies are also doing their part after regulators made stock buybacks easier. Local governments in Beijing, Shenzhen and Guangzhou have pledged their support.
The measures have helped arrest the downward spiral in Chinese shares, though sentiment remains muted. More loans
China also asked large banks to increase their loans to private companies to at least one-third of new lending, or two-thirds for small and medium-sized banks. That’s the first time that regulators have given specific targets on private lending. It’s a big ask and one that shareholders reacted badly to on Friday.
The concern is that banks will have to do too much of the heavy lifting, potentially leaving them with even more souring loans on their balance sheets. Credit hedging
China’s central bank helped revive a little-used hedging instrument that protects corporate bondholders against defaults, helping non-state companies sell debt. The People’s Bank of China (PBOC) said it would grant funding to financial institutions offering such tools, triggering a flurry of issuance for socalled credit risk mitigation warrants. Their popularity has brought down borrowing costs for firms like chemical producer Zhejiang Hengyi Group Co.
To be sure, credit spreads for junkrated borrowers remain wide. There’s still concern that China’s worse-thanexpected economic slowdown will eat into corporate profits for the most vulnerable companies, analysts say. At least one investor said the high yields make China’s private debt attractive. Equity tool
Signs of initial successes in the bond market have prompted the central bank to study ways in which similar tools can be brought to the stock market. The PBOC is asking financial institutions to come up with ideas, saying that it’s willing to provide funding to kick-start those programs. There’s been no detail yet on how such a measure would work or how much money the central bank plans to set aside to fund it.
China’s biggest state bank by assets is expanding its bond-to-equity swap program, throwing a lifeline to private firms that may not have the cash to meet interest obligations or repay bonds at face value. Industrial & Commercial Bank of China Ltd. reached initial agreements with 50 companies on the programs, six of which have kicked off. What’s next?
While the government’s quick-fix strategy has helped calm the panic for now, analysts at Nomura Holdings Inc. say China will need to do more in the coming months to support sentiment, adding that liquidity conditions remain tight. Making matters worse for China’s private sector is a record amount of debt that’s due to mature next quarter.