Wed, Nov 14, 2018 - Page 9 News List

What China is doing to rescue companies, and what is working

Beijing’s quick-fix strategy has helped calm the panic for now, but analysts say China must do more in the coming months to support investor sentiment

By Sofia Horta e Costaand Amanda Wang  /  Bloomberg, HONG KONG and SHANGHAI

First came the sweeping government pronouncements, then the flurry of actions — all aimed at shoring up China’s capital markets and rescuing struggling private companies.

But are they working?

Weeks into China’s latest campaign to support the world’s worst-performing major stock market and address record defaults, there have been some successes: Equities are far less volatile and more companies are selling debt at a lower cost.

Analysts are not convinced that the efforts will offer a sustainable fix for the financing problems that drove entrepreneurs toward a cliff edge in the first place.

“There’s no miracle drug to cure this disease,” said Dai Ming (戴明), a Shanghai-based fund manager with Hengsheng Asset Management Co. “Liquidity support will lift us out of a small-scale financial crisis and prevent bigger macro risks, but it won’t resolve the fundamental issue of financing difficulties for private and smaller firms.”

Here is a look at the support measures that China’s government, central bank and its lenders have taken in the past few weeks to ensure the supply of liquidity in the financial system.

China ordered its financial sector to address the risks associated with stock-backed loans, after the tumbling equity market triggered a rush of margin calls.

Banks were told to stop liquidating pledged shares, brokerages set aside funds to help ease the funding constraints for listed firms, while insurers and mutual funds were called on to buy securities. Companies are also doing their part after regulators made stock buybacks easier.

Local governments in Beijing, Shenzhen and Guangzhou have pledged their support.

The measures have helped arrest the downward spiral in Chinese shares, although sentiment remains muted. Brokerages, which provide most stock-backed loans, are preparing for losses by beefing up capital buffers.

While their shares jumped 23 percent since an almost six-year low in mid-October, they are still down 30 percent for this year. Stocks in the tech hub of Shenzhen — home to many privately controlled start-ups — are having their worst year-to-date performance since 2008.

China also asked large banks to increase their loans to private companies to at least one-third of new lending, or two-thirds for small and medium-sized banks. That is the first time that regulators have given specific targets on private lending.

It is a big request, and one that shareholders reacted badly to on Friday. The concern is that banks are being asked to do too much of the heavy lifting, potentially leaving them with even more souring loans on their balance sheets.

The central bank, the People’s Bank of China (PBOC), helped revive a little-used hedging instrument that protects corporate bondholders against defaults, helping non-state companies sell debt. The PBOC said it would grant funding to financial institutions offering such tools, triggering a flurry of issuance for so-called “credit risk mitigation warrants.” Their popularity has brought down borrowing costs for firms such as chemical producer Zhejiang Hengyi Group Co.

To be sure, credit spreads for junk-rated borrowers remain wide.

There is still concern that China’s worse-than-expected economic slowdown will eat into corporate profits for the most vulnerable companies, analysts say.

At least one investor said that the high yields make China’s private debt attractive.

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