Commentary on Political Economy

Thursday 5 December 2019

China’s bailout of private companies fails to halt defaults 

State funds lend $22.7bn to struggling listed groups using shares as collateral An investor looks at an electronic board at the Shanghai stock exchange

Chinese private companies are defaulting on their debt obligations even after receiving government bailouts, raising questions over Beijing’s efforts to rescue listed groups using public funds. Beijing last year launched one of the largest state-led campaigns to save troubled private sector businesses after falling stock prices hit so-called equity pledge financing, which enables companies to borrow using their own shares as collateral. Of 339 listed private companies that have received government funding since the rescue campaign began in August 2018, 75 later reneged on payments even after local courts ordered them to pay up, according to public records. “The government bailout is encouraging moral hazard and rent seeking,” said Bo Zhuang, an economist at TS Lombard. “It is solving short-term problems by creating long-term ones.” The bailouts are part of a drive by China to revive its debt-laden private sector, which is the country’s biggest taxpayer and employer but has been hit by a slowing economy. State-run financial institutions, including investment funds, brokerages and insurers, have lent more than Rmb160bn ($22.7bn) in the form of share pledge loans to distressed private-sector companies listed on the Shanghai and Shenzhen bourses, according to East Money Information, a financial information provider. The recipients of the bailout, which were mostly private sector manufacturers, ran into trouble after earlier rounds of share pledge loans, taken in previous years when their share prices were high, turned sour.

 A 30 per cent plunge in the benchmark CSI 300 index last year made it difficult for these borrowers to meet a requirement to buy back the shares at prices set when the loans were issued, plunging them into a liquidity crisis. The turmoil prompted Beijing to step in for fear some of the companies, many of which are large employers, might fail and wreak havoc on their local economies. While the rescue package provided a lifeline for battered private groups, it did not incentivise them to overhaul businesses to make them more profitable. Court records show Shenzhen-based Wenke Landscape Co, for example, defaulted on three payments worth a combined Rmb927,953 after it took a Rmb310m stock pledge loan from a city government-owned investment fund in May. An official at Wenke said it was “normal” to have overdue payments during an economic downturn. “The court ruling has nothing to do with the government funding we have received,” said the official. A Shanghai-based fund manager, however, said the firms that were bailed out had problems with either their management or business models. “They didn’t get into trouble because of a one-time mistake,” said the investor. “They got into trouble because they are bad companies.” The limitations of cash bailouts have prompted some cities to go a step further and acquire the troubled firms and install new management.

 FT research shows local governments have purchased controlling stakes in more than a dozen private firms hit by the equity pledge crisis — yet even in some of these cases the defaults have continued. In the eastern city of Longyan, the local government two months ago installed a former official as the president of Ideal Jewelry Industrial Co after a state-backed investment group bought a controlling stake in the firm for Rmb217m. In a statement, Sun Hailong, board secretary of Ideal Jewelry, a victim of the share pledge crisis, said the management reshuffle would “improve corporate governance and clarify responsibilities”. But last month, Ideal still defaulted on a payment to a supplier. “It is true that the failure of these firms may cause a series of economic and social problems,” said Wang Jun, an economist at China Center for International Economic Exchanges, a think-tank. “But the first rescue may lead to the second and the third as the troubled company thinks the government has an obligation to help them.” Mr Wang said Beijing should let distressed private firms go bankrupt instead of bailing them out. Copyright The Financial Times Limited 2019. All rights reserved. Share this article Reuse this content(opens in new window) 

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