Corporate debt pile is greatest threat to China’s economy
BEIJING may have averted a crisis in its stock markets with heavy-handed intervention, but the world’s biggest corporate debt pile – $16.1 trillion (R198.9 trillion) and rising – is a much greater threat to its slowing economy and will not be so easily managed.
Corporate China’s debts, at 160 percent of gross domestic product (GDP), are twice that of the US, having sharply deteriorated in the past five years, a study of more than 1 400 companies shows.
And the debt mountain is set to climb 77 percent to $28.8 trillion over the next five years, credit rating agency Standard & Poor’s (S&P) estimates.
Beijing’s policy interventions affecting corporate credit have so far been mostly designed to address a different goal – supporting economic growth, which is set to fall to a 25-year low this year.
It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend. Though it wants more of that credit going to smaller firms and innovative areas of the economy, such measures are blunt instruments.
“When the credit taps are opened, risks rise that the money is going to ‘problematic’ companies or entities,” said Louis Kuijs, the Royal Bank of Scotland chief economist for Greater China.
China’s banks made 1.28 trillion yuan (R2.58 trillion) in new loans in June, well up on May’s 900.8 billion yuan.
The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed. But there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high, and banks are reluctant to take risks.
Manufacturers’ debts are increasingly dwarfing their profits. The study found that in 2010, materials companies’ debts were 2.8 times their core profit. At end-2014 they were 5.3 times. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit. For industrials, from 2.5 to 4.2.
Low returns
Gao Hong, the investor relationship principal at railway equipment maker Jinxi Axle, which has seen its debt-to-core profit multiple triple to 10.25 between 2010 and 2014, said the company struggled to find profitable capital projects to invest in, so put money into short-term bank products that guaranteed returns.
“The risk for these (capital) programmes is so high and the rate of return so low that we have to make the best decision for our investors (by) purchasing bank products,” Gao said.
Much of the new lending is going to China’s inefficient state-owned enterprises (SOEs) as part of the government’s fiscal stimulus.
“They are lending more to fund infrastructure projects, and some may be done by SOEs where leverage is increasing as a result,” Tao Wang, the UBS head of China research, said.
“Prices are declining and revenue is slowing, and in this environment you cannot force too quick a deleverage – that would lead to a hard landing.
S&P expects China’s companies to account for 40 percent of the world’s new corporate lending in the period through 2019. But quantity is not the only problem.
Getting credit to the most efficient companies, where it has the most impact on the economy, would be easier if inefficient companies were allowed to fail, so markets can price debt effectively.
Policymakers have said they want market mechanisms to play a bigger role in credit pricing, but in practice have baulked at the consequences, effectively bailing out companies in trouble.
Rapid debt growth, opacity of risk and pricing and very high debt to GDP were a hazardous combination, S&P said.
It took an unprecedented series of measures to arrest the plunge in China’s stock markets, which are worth just over $8 trillion. Tackling corporate debt might make that seem like child’s play. – Reuters UBER Technologies lost a bid to dismiss a lawsuit over its claims to being safer than taxis.
US District Judge Jon Tigar in San Francisco on Friday allowed the case to proceed, finding that the app-based ridehailing service had advertised itself as “objectively and measurably safer” than competitors.
Yellow Cab and 18 other taxi services that operate in California metropolitan areas, including San Francisco and Los Angeles, sued Uber in March, alleging it misleads customers about its background checks for drivers and driver safety.
While letting the case move forward under a federal false advertising law, Tigar tossed the taxi companies’ unfair competition allegations and their demand for restitution under state law.
The judge cited the group’s slogan, “Going the distance to put people first”, as an example of the company’s argument that its advertising claims were nothing more than “puffery”.
Tigar said other statements could lead “a reasonable consumer” to “conclude that an Uber ride is objectively and measurably safer than a ride provided by a taxi or other competitor service”.
“We’re pleased that the court dismissed a substantial portion of the claims, and we continue to believe that the remainder of the lawsuit lacks merit,” Kristin Carvell, a spokeswoman for Uber, said. “Uber’s innovative technology allows it to focus on safety for riders and driver-partners before, during and after a ride in a way most alternatives cannot.”
Founded five years ago in San Francisco with venture capital funding, Uber has grown to serve 300 cities worldwide, stirring conflict with traditional taxi and car-for-hire businesses in Chicago, New York, Paris and Johannesburg. It has said its market value is $50 billion (R618bn).
Uber was sued in December by the district attorneys of San Francisco and Los Angeles, who accused it of falsely assuring customers that it used “industry-leading standards” to vet its drivers while failing to use fingerprints to check criminal histories. – Bloomberg