February 26, 2020

China’s Improving Economic Data Masks Deeper Problems

Short on cash in 2019, more and more Chinese companies issued i.o.u.s known as commercial acceptance bills instead of paying their bills in cash. By midyear, there were some $200 billion of these i.o.u.s circulating.

A brisk trade in the i.o.u.s has developed. Some companies paid in commercial acceptance bills sell them at a discount when they experience their own financial problems, spreading the potential risk to other parts of the economy if the issuer ultimately cannot pay up.

Other signs indicate that Chinese companies are having problems paying their bills. A record number of Chinese firms defaulted on bonds to local and foreign investors in 2019, including some high-profile companies like a giant state-run commodities firm and a conglomerate backed by the country’s most prestigious university.

Over the next two years, these companies will owe hundreds of billions of dollars to lenders and investors around the world. If they cannot pay, Chinese companies may find it getting more expensive to borrow money in the future.

China’s new restraint on lending has kept it from injecting vast amounts of money into the financial system and launching hugely expensive infrastructure projects to keep the economic gears spinning. At the same time, it is still freeing up money for companies to borrow, through steps like lowering the amount of cash from deposits that it requires China’s banks to keep in reserve for unexpected emergencies.

Those steps have not helped the economy much, which is a troubling trend, said Leland Miller, the chief executive of China Beige Book. A lot of money did make it to the 3,300 companies that his firm surveys, but their performance did not improve much.

“The fact that you aren’t seeing an ‘oomph’ is concerning,” Mr. Miller said. What’s more, he added, many of these firms are still swimming in debt.

Article source: https://www.nytimes.com/2020/01/16/business/economy/china-economy-gdp.html?emc=rss&partner=rss

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