China's companies are a snake eating its own tail
By Linette Lopez
October 24, 2015 12:42 PM
(Reuters) China's state-owned enterprises are a snake eating its own tail. Profits are falling, in part because of the costs of paying back debt. They are responding by adding more debt, making the matter worse.
In the first nine months of 2015, profits fell 8.2% across the board, according to state media organisation Xinhua. The slowdown accelerated in September, according to the report.
That, when coupled with their hefty debt load, has everyone from Wall Street analysts to the International Monetary Fund worried.
"This situation makes servicing debt obligations more difficult. In particular, the interest coverage ratio has fallen in SOEs, which have contributed to the bulk of the rise in credit," wrote the IMF in a report last month.
Unfortunately, the IMF also points out, without that debt some of these companies wouldn't be able to function.
"At the same time, deleveraging by firms could weigh on growth, while mounting corporate defaults would have adverse effects on bank balance sheets and credit availability, and thereby further weaken growth."
This is key to the China transition story. If the country wants to successfully move from an investment-based economy to a consumer-based economy without some kind of credit event, these SOEs need to be restructured. But if China wants the economy to keep chugging along, it has to keep giving SOEs access to credit.
The SOEs have been only too happy to gobble that credit up, adding to the debt pile they already have.
(Macquarie)
Lip service
"To stimulate the torpid SOEs, the government unveiled guidelines last month to address issues in mixed ownership and to introduce a modern enterprise system, which would make SOEs more market-oriented and improve efficiency," Xinhua said.That is true. The government did introduce vague measures to reform SOEs, but none of the measures convinced analysts.
"The SOE reform guidelines revealed in September is a start, but they fell short in addressing two main issues," said Societe Generale strategist Wei Yao said in a note.
"First, SOEs' corporate
governance can only be improved if they are subject to competition and
run by professionals. The guidelines' emphasis on strengthening the
communist party's control over SOEs seems to run counter to the idea.
Second, it is not clear how the government will resolve the issue of
zombie SOEs and their debt."
Meanwhile there's a bubble forming
China doesn't have all the time in the world to do this, especially because corporate bonds have become the hot new asset class in China since mainland stock indices crashed this summer.
Corporate bond sales have grown by 20% since this time last year. Bond
repos — a way for corporate bond holders to exchange their bonds for
short-term loans that they can then use to buy other assets — have seen
their volume grow 13% from this time last year, and 81% since the Q2
2015.
So what do you do? Do you stop the debt and risk disaster in short term?Or do you let the corporate keep gobbling until their profits are gone?
More From Business Insider
- There's a China zombie scenario the world is just starting to worry about
- A fundamental change in China came sooner than anybody thought
- The next China bubble is forming right before our eyes
- end quote from:
China's companies are a snake eating its own tail
China's state-owned enterprises are a snake eating its own tail. Profits are falling, in part...Business Insider
No comments:
Post a Comment