Four Zombie Industries Have ¥5.4 Trillion in Debt

Four of the industries loaded with overcapacity and zombie firms have 5.4 trillion yuan in debt. Of that, 2.8 trillion is bank loans, 1.6 trillion is bonds, trusts and other non-standard credit is 1 trillion.

Haitong Securities asks, what can we learn from 1998? Back then there was 2 trillion yuan in industries with overcapacity. NPLs rose from 1.69 trillion at the end of 1997 sharply to 3.68 trillion at the end of 2000, which means an increase of 2 trillion which was the debt from clearing out overcapacity. This cleaning up of overcapacity led to a banking bailout.

Removing the overcapacity caused the NPL ratio to rapidly increase. 1994-1997, China's commercial banks non-performing loan ratio, although an upward trend, but the range is limited, about 2% per year. 1998 to begin clearing overproduction, the NPL ratio rise significantly increased, and the absolute level of non-performing loan ratio reached 55 percent, historic highs. In this regard due to corporate debt ratio being too high, a lot of corporate debt is higher than the assets, there are many companies even without any assets; on the other hand, enjoy a stop when merging party undertake debt, interest-free dividend policies, leading to debt repayment rate is too low.
The debt shifted to the banks:
However, increasing non-performing loans of commercial banks is only the first step in the processing of debt. For bankruptcies and mergers of enterprises, nominally its debt default process, but the actual burden by state-owned enterprises are turning to the commercial banks. Without peeling, 2000 commercial banks' bad loans of up to 3.69 trillion, which was equivalent to GDP of 40%. In order to maintain the financial stability of the system and prevent the outbreak of systemic risk, the capacity to gradually completed, in 1999 open to commercial banks non-performing loans in the government-led process.
Important point: this debt was easily solved by a rapidly growing Chinese economy and low government debt levels. This time, debt levels are high and growth is slowing.
Ministry of Finance to issue special treasury bonds, commercial bank funding. First, the Ministry of Finance issued 270 billion yuan of special treasury bonds on Aug. 18, 1998 for a period of 30 years, coupon rate of 7.2%, only for the China Industrial and Commercial Bank of China, China Agricultural Bank, Bank of China and China Construction Bank directed issue, not to social marketing, the funds raised earmarked for bank capital above will be subsidized, thereby enhancing business the ability to deal with non-performing bank loans.

However, the actual process is limited non-performing loans, mainly due to write-off up to 120 billion yuan of bad loans is not. When this special treasury bonds, the four major banks in the carrying amount of the assets there is also a 120 billion yuan of bad loans are not written off, and thus part of special treasury bonds will be used to deal with bad debts. The remaining amount is used to deal with bad loans only 150 billion yuan, accounting for about 10% of the debt to be treated 2 trillion, which means also the need for other forms of non-performing loans for processing.
And then came the distressed debt firms:
MC turned out to be debt deal with the main force. In 1999, the Ministry of Finance were invested 10 billion established the Great Wall , Cinda, Huarong and Orient four financial asset management companies, when that is stripped owned commercial banks non-performing assets of about 1.4 billion yuan, accounting for an approximately 2 trillion of the debt 60%.

Directional bonds to replace non-performing assets of commercial banks burden substantially reduced. Popular terms, AMC stripped NPLs of commercial banks, namely commercial banks to sell non-performing loans to AMC. Commercial Banks sell bad assets, while AMC pay the consideration, which is the main form of payment directional bonds was taken. Thus after the release, the commercial bank non-performing loans of nearly 1.4 trillion 820 billion yuan convert fixed-rate bonds and 570 billion yuan in cash (from central bank refinancing).
The new growth industry for China over the next 5 to 10 years.

So how does 2016 line up? Haitong says its not so bad:
Risky debt as a percentage of GDP lower. In 1998, the annual GDP is only 8.5 trillion, while debt defaults as high as 2 trillion, accounting for up to 24% of GDP. In contrast, when the current round of production volume to China's economy has been greatly improved, 67.7 trillion annual GDP in 2015, even a conservative estimate of GDP growth for 2015 was 6.5%, GDP will rise to 72.1 trillion, risky debt accounting for only 7% of GDP, in the face of debt treatment, the economic strength of the country stronger.

Risky debt to fiscal revenue is also lower. When the annual revenue for the reference index, this feature more prominent. 98 years, the national public revenue only inadequate trillion debt default of its two-fold. At present, our country's public revenue has risen to 14 trillion, in extreme cases, the state's financial aid to 5.4 trillion national debt, the size of only about 40% of public revenue.
The difference today is a slowing economy with already high debt levels, and inflationary solutions will cause the yuan to devalue. There's no easy solution this time. It's solvable if they act swiftly and boldly, but the costs will be higher.

iFeng: 四大产能过剩行业负债5.4万亿 98年有什么经验?

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