Industrial Securities Runs Supply Side Reform Numbers

Industrial Securities digs into the numbers, looking at the 30% least profitable/weakest firms.

The good:

1) The 30% most serious loss makers in 2015 enterprises dragged economic indicators: fixed investment only 0.5 percentage points; consumption only 0.7 percentage points;

2) loss of business tax contribution itself is small, the maximum unemployment benefits require a total of 161.8 billion yuan;

3) Potential provision for bad debts banks face less than bad loan provisions + annual profit.

"Worry":

4) a reference to the 1998 production rate, considering the stock of construction in progress, impact on investment may be greater;

5) asset quality problems may constrain bank lending capacity;

6) compared with 1998, the current round of production cycle lacks new growth points.

Industrial Securities believes the economy can weather the storm even in a worst case scenario where all loss making firms are shuttered.

In extreme hypothesis, we assume the 30% of industrial enterprises with the most serious losses face clearing pressure, and compare to the situation of all loss-making enterprises being closed down. Overall, the supply-side reforms drag on consumption and investment are relatively limited, and the reference "on the iron and steel industry turnaround guidance" and other reform guidance document, complete the supply side reforms may take a long time about 5 years, overall risks more controllable.

Contribution of loss-making enterprises to invest less than 0.5%

According to our estimates, the 30% of industrial enterprises with the most serious losses stock of fixed assets of enterprises account for about 10% of the entire industrial sector, the assumption is proportional to the stock of fixed assets and investments (in fact it is likely to overestimate the impact of reforms), fixed assets in 2015 dragged down investment growth of about 0.5 percentage points. If we extend this coverage to all loss-making enterprises, which accounted for about 13.5% share of the industrial sector, the growth rate of fixed asset investment dragged down about 0.7 percentage points.

Loss-making enterprises direct drag on consumption is limited

In terms of employment, 30% of industrial enterprises with the most serious losses have 8.99 million employees, according to a loss of employees an average of 5.6 million in annual revenue, according to unemployment benefits per capita 1,500 yuan / month basis, income of workers decreased by about 314.6 billion, while the current Chinese per capita consumption propensity of about 62.6% of total consumption in 2015, dragged down about 0.7%. If calculated in accordance with all the loss-making enterprises, the figure was 1.3%.

The table below compares all loss making firms (left) to the 30% most serious (right). The two percentage columns show the weight of these firms in the total national figure. From top to bottom is fixed asset investment, effect on growth rate (negative), unemployment, unemployment funds, effect on consumption, tax loss, total debt.

There's also a table of the effect of the 30% worst case firms and their forecast impact on banks in coming years. The top line is the NPL ratio, the fourth line in red is the bad debt disposal, the bottom red line is pre-tax profit growth (yoy).

iFeng: 供给侧改革对中国经济影响到底有多大(图)