SinoInsight 1
On Jan. 28, the People’s Bank of China gave S&P Global Inc. approval to start offering credit-rating services in China via a wholly owned subsidiary based in Beijing.
State media hailed the entry of S&P into the mainland credit rating market as an important part of the gradual opening up of China’s financial industry.
OUR TAKE
1. We believe that the CCP allowed S&P into China to give mainland enterprises a “leg up” in securing financing and issuing bonds as the Chinese economy worsens.
The Sino-U.S. trade war has accelerated the deterioration of the Chinese economy, triggered a debt crisis for mainland firms, and raised costs of corporate financing. Also, 2019 is a peak year for the maturing of bonds issued by Chinese property developers. China could see a financial crisis if the real estate bubble bursts due to a large number of real estate companies folding as a result of collapsing capital chains.
2. China’s ability to grow its foreign exchange reserves has been severely impacted by the trade war. The CCP will likely be looking for other ways to boost foreign investment and make up for its earning shortfall in trade. However, China’s rating agencies lack credibility. Getting a world-renowned credit-rating agency to endorse mainland enterprises is one way to “fix” the foreign investment problem.
Due to the machinations of the CCP dictatorship, foreign companies have not been able to avoid the “when in Rome” syndrome upon entering the mainland. Put another way, foreign firms tend to be influenced by the culture of corruption in Chinese society. We do not rule out the possibility that S&P will “do as the Romans do” in China, especially if the company shares interests with the CCP government.
SinoInsight 2
China’s A-shares listed companies released their 2018 annual reports between Jan. 29 to Jan. 31. Per their reports, many of the companies saw a huge loss in performance, including sharp revenue declines.
In 2018, 96 public companies suffered more than 1 billion yuan in losses, with total losses reaching 205.08 billion yuan, according to mainland financial news and information service provide Cailianshe. Of the 96 companies, 35 sustained a net loss of over 2 billion yuan, while seven companies suffered a net loss of more than 5 billion yuan. Gaming and entertainment company Zeus Entertainment (listed as Dalian Zeus Entertainment Co. Ltd.) suffered the heaviest net loss in 2018 (between 7.3 billion yuan to 7.8 billion yuan).
OUR TAKE
1. We believe the poor performance of mainland public companies in 2018 is a sign that China’s debt-financed economic growth model has reached the end of the road.
2. According to central bank data, the scale of social financing in China in 2018 was 185.77 trillion yuan, a cumulative increase of 19.26 trillion yuan from a year ago. Assuming a 5 percent financing interest rate and calculating from the start of the year, enterprises had to pay 9.29 trillion yuan worth of interests on their debt in 2018.
Meanwhile, China’s National Bureau of Statistics estimates that the country’s GDP will reach 90 trillion yuan in 2018, an increase of 6.6 percent (a nominal increase of 7.32 trillion yuan from a year ago).
If China was a company, then it failed to make enough in 2018 (7.32 trillion yuan) to cover its interest payments (9.29 trillion yuan). In fact, China would have made losses of close to 3 trillion (after accounting for depreciation of fixed assets).
3. China Chengxin Credit Rating Group estimates that local governments will issue an estimated 3.2 trillion to 3.5 trillion worth of new bonds in 2019, according to a Dec. 20 report by Xinhua’s Economic Information Daily.
Taking the macro view, the issuance of new debt in 2019 is only enough to cover the debt interest owed by Chinese companies in 2018.
We believe that the 2018 losses suffered by many public companies are just a prelude to a coming “debt tsunami.” With the ongoing Sino-U.S. trade war, the Chinese economy faces charging Gray Rhinos in 2019.