How have the recent cash crunch debacle impact Chinese corporations in terms of their daily financing needs?

Xinhua News, one the leading official state media agencies in China, reported on December 28, 2013, that several Chinese corporations were facing severe financial difficulties, following the repeated episodes of spikes in the interbank lending rates. Readers might recall the events two weeks ago where Chinese interbank rates, including the benchmark seven-day repurchase (repo) rates, and the Shanghai Interbank Overnight Lending Rates (SHIBOR) climbed to almost 10.0 to 13.0 percent, before the country’s central bank, the People’s Bank of China (PBOC) came in and inject the much needed liquidity into the monetary system in a bid to calm down the volatilities shown in the Chinese money markets. The latest interbank lending rate as quoted by the average spot rates shown in the Shanghai Interbank Overnight Lending Rates (SHIBOR) was 3.513 percent as of early Asian trading hours on December 30, 2013, down from the 8.0 to 9.0 percent levels last recorded on December 19, 2013 before the PBOC stepped in to bring down the rates. The news of the apparent cash crunch which took place two weeks ago, was reported by the Chinese business portal, Netease.com, and some of the reasons being attributed to the sudden spikes in interbank lending rates include banks and financial institutions operating in China were scheduled to raise capital in order to meet the regulatory limits regarding capital adequacy ratios/targets. Several banks were reportedly having some cash funding issues, and rival banks were hesitant to lend and/or borrow in order to minimise their leverage exposures. That sparked quite a series of events that were reminiscent to the June/July 2013 interbank rate spikes to almost 14.0 to 16.0 percent before the PBOC stepped in to provide the necessary liquidity into the system. The delayed intervention moves in June/July 2013 have sent by major global stock indices plunging to their new lows, before succumbing to renew buying following the PBOC’s decision to inject much needed liquidity into the monetary system two weeks after the incident was reported by Bloomberg News in early June.

The impact of the recent spikes in the Chinese interbank rates have caused private enterprises to face severe cash crunches as they are mandated to adhere to strict regulatory requirements regarding capital levels. It was reported on the Dec. 28 online Xinhua news article that at least 40 companies, mostly in the textile industry, and located in east China’s Jiangsu, and Zhejiang Provinces have been declared bankrupt for the past six months. Some of the reasons outlined by an official from the industry’s leading trade group, China National Textile and Apparel Council include the failure to secure funding for their debts, and limits to credit lines available to these textile businesses have taken a toll of many corporations, especially those that were newly established in the textile and garments industries. One of the spokespersons from the industry group was quoted by Xinhua News that there was another large textile firm which declared bankruptcy, leaving behind 600.0 million Chinese yuan worth of outstanding debt obligations.

When interviewed, a textile business owner based in north-eastern China was quoted by Xinhua.net that most of textile firms which used to indulge in massive borrowing binges were now facing difficulties in servicing their existing and new loans due to the widespread fear among banks and financial institutions that if borrowing regulatory requirements were not strictly enforced; they might not be able to meet the country’s capital requirements. These financial institutions do not want violate the strict capital requirements as penalties for non-conformance could result in severe lending/borrowing restrictions, and unnecessary tight scrutiny coming from the regulators.

According to the Dec. 28 Xinhua.net news article, it reported that one of the worst hardest industry hits to the firm’s cash shortfalls came from the small and medium sized enterprises (SMEs) due to the size and lack of accessibility to readily available cash resources, came as nothing surprising for many. These SMEs do not have the capabilities as compared to their counterparts in the large industries, including coping with debt and leverage, profit margins were relatively slim, and they do not command as much clout in terms of debt negotiations with their lenders. The PBOC was said to have excess cash reserves of 1.5 trillion Chinese Yuan to defend the monetary system from any potential shortfalls. However, if future events involving the spikes seen in the interbank rates were to be a norm going forward, particularly during the weeks leading up to the close of the quarter-end, the question is whether the PBOC intervene in a timely basis, or will they choose to sit out and not do something to calm the money markets? The PBOC is also facing a dilemma as they were supposed to carry out the reforms that were outlined in the Third Plenum meetings in November 2013, while also maintaining a relatively non-interventionist role in its conduct of the monetary policies, so as not to cause an imbalance in the cost of living, affordability, particularly for those folks that are in their retirement/prime years.

According to the Dec. 28 Xinhua.net news reported that a recent research conducted by one of the major global credit agencies, Moody’s, found that total borrowing in the Chinese mainland’s non-financial private sector during the fiscal year ended in October 2013, was likely to equal 180.0 percent of the entire national economic output for the same period. The credit rating agency went on further to explain that the massive scrambles among many highly leveraged firms to repay loans were expected to be more frequent going forward, and could pose severe credit risks faced by many SMEs in China.

There are long-term solutions which the PBOC could consider, but it is unlikely that they will do so. This includes the combination of a liberalised interest rate regime, coupled with an optimised credit structure which could be introduced in phases that might be able to go a long way in reassuring investors that the Chinese monetary system remains open and transparent about their timely disclosures. Companies, especially the SMEs, should also be regularly updated on their regulatory limits and not go overboard in their lending/borrowing activities.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

2 thoughts on “How have the recent cash crunch debacle impact Chinese corporations in terms of their daily financing needs?

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    • I will only comment that the Chinese government need to gradually open itself to financial reforms, and probably keep investors informed of what’s going on with the money markets and not leave many in the dark trying to figure out what the interbank rates are. But, it is not going to change within these few years. Probably when there are many of such episodes happening down the road, they might, but as we speak, none of yet has turned up. Thanks.

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