China’s Renationalisation of Small Medium Sized Businesses

Has China’s short run of small and medium sized SME private companies come to an end? Greed has pushed private companies to over-leverage themselves, but the catalyst to this movement is the Chinese government’s tightening of credit.

China Reins in Credit
China has built huge new infrastructure, mainly financed by state and city government borrowing. This is, in part, to goose growth, jobs and therefore social harmony at any cost. This borrowing has steadily increased as the Chinese economy has slowed down. China wants to rein in and reduce this borrowing.

Beijing has told their banks, all state owned, to reduce lending, so the banks have done this, mainly by reduced lending to the riskier small and medium sized SME businesses. This has led to a credit crisis of SMEs. China’s large state owned companies SOEs still have access to capital.

SMEs Leverage Way Out, Pledge Shares
In order to finance their companies, as a standard policy, most SMEs have pledged company shares as collateral for additional loans. As these companies leverage out and ask for more loans for cash flow, they cannot receive any further funds from the banks. These SMEs are stretched to the limit

All but 13 of the 3,491 companies listed on China’s two stock exchanges have pledged their equities as collaterals for bank loans, according to data by the China Securities Depository and Clearing Corporation, with the total value estimated at 4.5 trillion yuan, equivalent to the world’s 21st biggest economy…

As China has shut down P2P lending, there is no other choice for financing, these companies are losing company shares to the state owned banks. In the past companies have sold stocks and bonds, but the stock market has fallen 33% recently to a 4 year low, cutting off that channel of capital. China’s bond market has also buckled with an increasing number of defaults.

At least 32 companies listed on the Shanghai and Shenzhen bourses sold controlling stakes to the Chinese state as of October 17, six of them to the central government, while 26 were taken over by provincial or city-level agencies, according to data by Shanghai Wind and China International Capital Corporation (CICC).

Call it privatisation in reverse, or re-nationalisation, as Chinese capitalism lays in crisis.

Stocks have fallen 33%, there is a trade war with the US, reduced international orders, slower demand, tighter lending, there is nowhere to hide. In order to cope the larger firms have liquidated assets, which then leads to lower stock prices.

Private Companies Run out of Financing
Private companies have no choice but to either sell to state owned enterprises SOEs, or go bankrupt and have shares and other assets such as land, buildings, equipment, pledged as collateral, seized by state owned banks. Either way, they are no longer private. Beijing has allocated a huge war chest in order to capitalize these failing private firms.

The cash crunch was more dire at Shenzhen Yitoa Intelligent Control, a maker of devices for smart homes and connected appliances, which pledged its land holdings, office buildings and its chairman’s 26.6 per cent stake as collateral to banks. The company has 462 million yuan of debt due in April 2022.

Wuhu Token Science, a maker of thin film material for flat panel displays used by customers including Tesla, last week buckled under a 52 per cent share slump and sold a significant stake with voting rights to the state asset management unit of its home province Anhui.

Chinese Governments Re-Nationalize Private Companies
The Chinese government has now taken on a huge amount of private company debt, with deteriorating assets and books. These companies are still functional, but now under government financing. People still have their jobs, so there is no panic on the streets. How this will play out in the future is uncertain. The central and provincial governments, owners of all this capital, have the choice of keeping private companies alive until they are financially viable again, or to nationalize them.

Uncertain is the issue of state owned companies and private firms coexisting in China. Is this possible? If China controls everything, and it does, then is there any room left for private enterprise? Further, as private enterprise in China is solely dependent on the central government, can any private firm resist the political or other demands from the central government? It will be impossible to resist that the Communist Part is first and foremost, as they hold all the cards.

2018 Oct 23 Chinese shares fall as government lifeline to private sector fails to lift investors

Zhou said Beijing was also trying to shy away from the direct measures to prop up the market that it used in 2015 to end that summer’s market rout, which spawned insider trading scandals by some state securities firms…

The authorities were forced to act because Chinese private companies and investors had pledged 4.5 trillion yuan (US$650 billion) in shares as collateral for loans – a method widely used by private companies to secure funds because they often do not qualify for regular bank loans.

As the stock market fell, so did the value of the collateral, prompting banks to demand additional funds.

2018 Oct 25 US sell-off spills over to Asia, sending stocks in mainland China, Hong Kong tumbling

The global turbulence coincided with Chinese policymakers’ pledge to shore up the nation’s stock market, the worst performer this year among the world’s major benchmarks this year. Measures including more funding access for smaller companies facing liquidity crunch were announced last week.

2018 Oct 25 Why the US-China trade war complicates Beijing’s response to the market crash

This round of reflation was fuelled in large part by major shareholders of Chinese companies and investors pledging their stock to obtain loans for personal or business purposes, because they often do not qualify for regular bank loans.

As the stock market falls, so does the value of the collateral, prompting banks to demand additional funds. Investors are concerned that forced sales of stock to meet these demands would create a vicious downward spiral in the stock market.

2018 Nov 14 China’s bankers grapple with new credit rules to private borrowers as officials sow confusion with flip-flopping policies

2018 Nov 14 Call for action to back up China’s words of support for private enterprise

2018 Nov 16 China orders banks to ‘improve political positioning’ and boost lending after October financial data disappoints

2018 Nov 17 China’s vow to help private firms is plausible – but desperate, too: China orders banks, local government to provide loans to SMEs, but they are not cooperating. Banks don’t want bad debt, local government has own liquidity issues.

2018 Nov 19 Can the Communist Party’s unprecedented endorsement calm the frayed nerves in China’s private sector? Three major issues: 1) high tax, 2) state banks will not lend 3) persecution of private business owners

2018 Nov 19 Xi’s sudden embrace of private firms can’t solve China’s economic problems: Cannot increase state sector growth. Cannot ramp up real estate because already close to over-heating,speculation. The only other way is private business, but banks won’t lend to them as much higher risk.

2018 Dec 19 Can China’s leaders restore confidence to private businesses?

Xi has, above all else, sought to ensure the party’s political control over all aspects of the economy, including the requirement that companies establish party cells that would be able to influence company operations. But his about-face on the role of the private sector shows a more pragmatic side.

2018 Dec 20 China’s private firms shy away from bank borrowing, delaying investment: Very comprehensive article about why China’s SMEs do not get loans, and why some do not want loans.

2018 Dec 27 How US trade war could leave Chinese private firms at risk of being ‘taxed to death’