State-owned companies get too many loans – Arthur Kroeber

Arthur Kroeber

Private companies have a hard time getting bank loans, says economist Arthur Kroeber to Barron's. But that is nothing new, he adds, the problem is that state-owned companies get loans too easy. That division is more important than the level of China's debts, he adds. "Too much attention has been paid to the debt problem."

Barron's:

Arthur Kroeber: The latest survey of corporate chief financial officers showed that the finance conditions for private companies is quite poor. There is a problem there, but they have always had that issue. The problems are not so much that private companies get too little; it’s that state-owned companies get too much. It is loss of opportunities for private companies to expand and do as much as they are capable of doing... 

Kroeber: I agree with the generalization that way too much attention has been paid to the debt problem and its significance has in many ways been exaggerated. But I think there are some issues that are material. China’s gross debt to GDP is probably around 260%. That is not particularly high for a developed economy, but it is extremely high for a developing economy. Although you have not had deleveraging in the sense of a reduction in that ratio, it is clearly an aim of government policy not to let that ratio rise—or not very much. It is an important constraint on policy and one of the reasons, over the last year and a half as the economy has slowed, that the government doesn’t want to do more debt-fueled stimulus.

More in Barron's.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Why a melting shadow banking system is still possible - Sara Hsu

A narrow escape from default of the USD495 million of the trust fund, organized by the ICBC for the Shanxi Zhenfu Energy Group in the last week of January, is not the end of the troubles for other trust funds, writes shadow banking expert Sara Hsu in The Diplomat. "A liquidity crisis might expose more problems."

Sara Hsu:

A little publicized document called the “Trust Industry Risk Assessment Report,” released by Shanghai Jiaotong University, expands on these conclusions. After conducting stress tests on 60 trusts, the report found that solvency risk is relatively low, but that liquidity risk may present a real problem. 

The report also found that trust products are not priced for risk of the underlying asset. This, coupled with rapid expansion of the trust industry and with an implicit payment guarantee, has heightened the risks associated with trust products. The report does not mention the types of loans that trust products are based upon, and this is also a rising concern. Some of the trust loan defaults have been based on loans to the coal industry, which  has declined in profitability. A full third of trust loans have been extended to the real estate or infrastructure construction industries, which have experienced price bubbles and low levels of occupancy. Growth in these sectors is expected to decline in 2014. With these reversals, the credit risk associated with trust loans will only rise. 

All of these risks in fundamentals add to growing concern about China’s trust sector. This, coupled with a lack of regulation, and absence of risk control departments in most trust firms, sets the stage for a potential trust industry failure. Such an event may be triggered by an overall reversal in consumer sentiment—should households stop buying trust and wealth management products that contain these trust loans, the maturity mismatch inherent in the trust lending process (borrow short from households and lend long to firms) may truly present a problem. A liquidity crisis in the trust sector will expose some of the risks that have been covered up by steady income streams, and then these unregulated entities may face a final collapse.

More in The Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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