We may be about to see what it's like when big Chinese companies go bankrupt. After a weekend at...
Tue, Dec 22, 2015, 4:30 AM EST - U.S. Markets open in 5 hrs.
Everything just changed for Chinese companies
By Linette Lopez
14 hours ago
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(Reuters) We may be about to see what it's like when big Chinese companies go bankrupt.
After a weekend at China's Central Economic Work Conference,
Chinese officials have laid out details for what promises to be an
excruciating reform period for its corporate sector.
"China will create conditions for execution of bankruptcy procedures
based on market rules, and speed up trials of bankruptcy liquidation
cases," said a report from Chinese state media agency Xinhua.
"In China, some industrial sectors have been struggling with weak
demand and falling prices while suffering from outdated production
ability, pushing their profitability down to dangerously low levels,"
the report said.
The report added that Monday's measures will allow the market to play
"a bigger role" in allocating resources and push under-performing
businesses to exit the market.
Zombies
The problem here is China's glut of "zombie companies"
— mostly state-owned corporates with tons of debt. Officials,
economists, and investors alike have warned that they need to be
restructured, but those restructurings will lead to write-downs at
banks, it is unclear how much pain the Chinese banking sector can take.
Here's what the International Monetary Fund said about the situation earlier this fall:
The high level of credit
could weigh on China's growth and financial stability. The efficiency of
the investment financed by credit has been falling, with a commensurate
drop in corporate sector profitability. This situation makes servicing
debt obligations more difficult.
Officials have been talking about this kind of reform for months, but
they've been light on details. That's partly because this kind of
reform is both difficult (for any country) and unprecedented in China.
Big companies just don't go bankrupt.
View gallery
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(China Photos/Getty Images) So
far the government has responded to increasingly unprofitable companies
by allowing them to take on more debt, but as Societe Generale
economist Wei Yao has argued, continuing down that road sets the country
up for disaster.
"Having the central government bail out every zombie company
and pay for the whole restructuring would not only be very costly to
Chinese consumers (the taxpayers) but would also exacerbate moral
hazard, thus impeding long-term positive developments of domestic
capital markets," she wrote.
"However, there is no formula on how much credit risk China's
financial market can handle by itself without plunging into a full-blown
crisis," she added.
China is walking a tightrope, in other words.
According to Xinhua, the
government will cut taxes for businesses, figure out support programs
for the unemployed and come up with ways to handle non-performing
assets.
Monetary conditions will remain loose too. The PBOC has already been
cutting interest rates to stimulate the economy since the end of 2014,
and that will continue through this process.
For their part, companies are
being encouraged to engage in M&A to consolidate, cut costs and
streamline. Better find a partner.
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