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The global economy should be ready for another massive blow in the coming months as Chinese economy is already feeling the heat and the world temperature is all set to get into record high. In my research I came across that the corporate bond and debt piled up with Chinese banks are on the record levels. Government is focused towards buying up the bonds and taking stakes in the companies but many of the state run companies are under stress. Debt to equity swaps are being used to implemented to reduce the stress level of the banks and that’s the cause for worry as equity valuations are under stress when global commodity, mining, crude and ancillary industries are under stress. Further when currency war is on the game then equities are under more stress. Banks had an estimated 2 trillion yuan worth of non-performing loans on their books which has increased by 35 percent in value from the same period 2015.  Doesn’t worry QE will soon follow after the collapse happens and also extensive currency devaluations to spook sales for these debt trapped companies will be master key.

According to the sources of the research its being found that the value loans owed by the nation’s nonfinancial companies alone equaled more than 160 percent of the nation’s gross domestic product as of May 2015. In between the Asset Reconstruction Companies or Asset Management companies as they are being called in china have washed off their hands form buying stressed assets as the numbers have surged in the last decade. Discounted asset valuations are not enough to buy them at the present discounted price. The economy is not growing in double digits and investors are cautious and are very much reluctant to invest keeping in mind the collapse of the equity markets in 2015.  Government is focusing on conversion of the debt to the equity but there are no buyers neither demands for the same. Company’s profitability’s are bleeding and no sign of any recovery of the same.

Already many companies like private shipbuilder Rongsheng Heavy Industries Group Holdings, industrial machine manufacturer China Erzhong Group (Deyang) Heavy Industries Co. and the state-run steel trader Sinosteel Corp which are heaviliy indebted have announced plans to negotiate with the creditors for debt to equity conversion. According to the sources an executive at China Development Bank (CDB), a government policy bank, said the first batch of debt-equity swaps would be worth around 1 trillion yuan. Other Chinese banks and financial institution like Bank of China, Industrial and Commercial Bank of China, China Minsheng Bank, the Export-Import Bank of China, and China Merchants Bank are in the pipeline. The overall story is that banks are becoming partners of the corporate collapse. For example Sinosteel, which owes some 75 billion yuan to more than 80 banks, has submitted a swap plan to  the trader and has proposed converting some bank debt into company stakes that would be distributed among the subsidiaries of affected banks. God bless those who are parking funds in these banks since banks and the financial industry players don’t know the depth of the hole of the losses and duration of the global slowdown. Bohai Steel, a financially crippled steelmaker cannot repay the 192 billion yuan it owes to more than 100 creditors. This is the case for most of the prominent companies of the Chinese economy. Its true that banks will need more capital once these debts are converted into equity bt the point is that does the banks are capable enough to manage and understand the company’s business and revenue earnings sources. Further the day will come when banks will exit these equities and this will plunge the stocks further in the long term.

 Currently banks, fund managers and insurance companies have been pulling back on bond investments in china. New bond issuance will be a problem now as takers of the same will be more refusing keeping in mind the economic situation of the companies issuing bonds. China’s SOE liabilities were at 115 per cent of GDP last year – up from less than 100 per cent in 2012. It reveals that government policies for the growth of the industry and economy have faltered long back and now the skeletons are coming out. Mostly the state controlled companies which have been a comfort zone for the investors are in trouble and investors who were investing based on government backup behind these companies are no long interested. The story doesn’t end here. Its beginning. Banks capitalization will be done through stimulus packages which china will come up. Any surge in the Chinese equity markets will be option for the banks to sell the equities. QE will be soon to create more inflows into markets.

Indraneel Sen GuptaIndraneel Sen Gupta

Global Macro Economic Researcher and Business Strategist

Master of Economics, MBA in International Management, ICWAI (Final)

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God has been kind and the people with whom I had the journey of my career over the last 19 years have been great fortune to have as my best friends standing today in this journey. Expertise in global macroeconomic analysis, financial advisory, product development, and business strategy, I bring View Full Profile

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One Comment

  1. Abhishek Munjasara says:

    Good Article Sir….

    One thing more is Actual NPA of the China is much more than as actual declared by the Bank of China….

    Needs a severe attention as it will affect at the global level and India wont be exception to that.

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June 2024