Pri­vate-sec­tor fi­nanc­ing to get needed boost

China Daily European Weekly - - Comment - The au­thor is a re­searcher with the In­ter­na­tional Mone­tary In­sti­tute of Ren­min Univer­sity of China. The views do not nec­es­sar­ily re­flect those of China Daily.

Bond mar­ket skep­ti­cism has made credit ac­cess dif­fi­cult, but new poli­cies can of­fer turn­ing points

First, the hid­den dan­ger was made ap­par­ent a long time ago. In the past decade, China has ex­pe­ri­enced three rounds of credit ex­pan­sion and con­trac­tion. In the first round of credit ex­pan­sion, 4 tril­lion yuan ($575 bil­lion; 509 bil­lion eu­ros; £451 bil­lion) was put into the mar­ket as an eco­nomic stim­u­lus and a way to deal with the global eco­nomic cri­sis in 2008, giv­ing pri­vate com­pa­nies much credit sup­port. But in the other two rounds, pri­vate com­pa­nies didn’t gain much sup­port and also had dif­fi­cul­ties in get­ting fi­nanc­ing, like what is hap­pen­ing now.

Sec­ond, pri­vate com­pa­nies them­selves also have some prob­lems, es­pe­cially when com­pared with Stated-owned com­pa­nies. The de­crease in rev­enue for pri­vate com­pa­nies is faster than that of the SOEs, and the de­crease in cost for the pri­vate com­pa­nies is slower than that of the SOEs. Thus, the in­crease of the profit of the pri­vate com­pa­nies is weaker than that of the SOEs, and has been stay­ing at a low level. The size and growth of in­ter­est that pri­vate com­pa­nies are pay­ing are both still higher than SOEs, and are at rel­a­tively high lev­els.

So if we look at the as­sets to li­a­bil­i­ties ra­tio, there are sig­nif­i­cant dif­fer­ences between the pri­vate com­pa­nies and the SOEs. Since the launch of sup­ply-side re­form in China in 2015, SOEs’ lever­age ra­tio has stayed steady and has slightly low­ered, but that of the pri­vate com­pa­nies has in­creased, and al­most reached a peak since 2012. More­over, pri­vate com­pa­nies have more short-term debt than SOEs. In the sec­ond quar­ter of 2018, the net cash flow of pri­vate com­pa­nies reached the low­est point since 2008.

Although the sit­u­a­tion is still tough, from the pol­icy side we can see signs that there might be turn­ing points. Since the be­gin­ning of this year, mone­tary eas­ing has been con­firmed, and since July, credit eas­ing poli­cies have been put for­ward. And dif­fer­ent from what we saw be­fore, this round of credit eas­ing tar­gets pri­vate com­pa­nies in­stead of gov­ern­men­tal in­fra­struc­ture projects or the real es­tate in­dus­try. With more high-level sig­nals on boost­ing the de­vel­op­ment of pri­vate com­pa­nies be­ing re­leased, rel­a­tive credit eas­ing poli­cies for pri­vate com­pa­nies will con­tinue com­ing out.

I think the poli­cies should ad­vo­cate that bond mar­kets dif­fer­en­ti­ate fi­nanc­ing en­ti­ties from the per­spec­tive of whether they are good com­pa­nies, rather than whether they are pri­vate com­pa­nies or SOEs.

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