China flinched again.
This is what the government refers to as “targeted easing”, but many analysts say that these small jolts of stimulus will simply worsen China’s mounting debt problems without solving the root of the issue.
“China’s debt problem lies with the corporate sector,” wrote Societe Generale analyst Wei Yao in a recent note. “The cure should be capacity consolidation and debt restructuring, rather than another stimulus package targeted to boost investment demand.”
It breaks down like this.
The government has decided that China’s economy must cool down to normalize, and that’s hurting Chinese companies in a few ways. The government itself is spending less, investors are taking their money elsewhere — the country’s dollar reserves declined more than ever last quarter — and consumers are buying less too.
All in all demand is weakening. We know this because corporate margins are thinning and China’s producer-price index has deflated 6.7% in the past 36 months.
So Chinese companies have been trying to take in as much cash as possible to ride this period. Short-term lending to corporates spiked in September to $US26.8 billion from $US11.2 billion in August. Long-term lending hit a four-month high of $US45.9 billion in September, up from $US39.3 billion in August.
This is because corporates know the Central Bank (affectionately known as “Big Mama”) isn’t likely to help them out with a full blown rate cut as long as it’s committed to the economy’s normalization.
What all that means for banks is that companies — lacking revenue — may not be so regular with their debt payments. Banks are already holding a lot of debt on their balance sheets too; the country’s debt to GDP level hit 250% this summer.
So banks are doing whatever they can to raise some cash to stay afloat. They see companies like Agile Property Holdings — the $US20 billion company that canceled a debt issuance last week as its Chairman disappeared — and they worry of implosions across sectors the government once propped up (like housing, of course).
The Bank of China is planning the biggest sale of shares ever — $US6.5 billion to offshore investors, Bloomberg says. That’s a debt cushion.
Again, this isn’t really addressing the problem: corporate debt. Companies in danger of defaulting on loans need to be restructured and recapitalized.
Until that happens Chinese banks will constantly be teetering on the edge — sidled with corporate debt, black holes for cash. Zombified.