Bond market skepticism has made credit access difficult, but new policies can offer turning points
Since the beginning of this year, there have been a series of defaults in the credit debt market. Whether in volume or size, private companies are responsible for more than half of these defaults. Under this circumstance, bond market investors are reluctant to lend money to private companies, and some institutions even try to avoid it. It is not only that it is difficult for private companies to get financing in the bond market, but also from other financial channels.
To be honest, it is not only in China that banks are cautious about lending money to small and medium-sized companies. The difficulty of financing for private companies is common across the world. But China’s current situation is still worth pondering, and there are mainly two reasons for this phenomenon.
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.
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.
(China Daily European Weekly 11/30/2018 page12)