What this tells us is that demand has broadly collapsed somehow and
while failing firms will be recapped or merged, there is no clear
reason to understand if demand will recover.
This appears to be the expected long stagnation period that China
needs to pass through as the population base strengthens and
accumulates wealth sufficient to end this natural consolidation.
The State really cannot do much else as stimulus is merely sucked
into unproductive real estate.
The economy can now transition to a natural consumption based system
that spends heavily on services. This is happening anyway but it is
a solid road to internal growth and capital absorption.
It's Not 2008 For
Chinese Companies — It's Worse
By Linette
Lopez – Fri, 19 Sep, 2014 1:38 PM EDT
If you think we saw
bad things out of China this week, brace yourselves. It's going to
get worse.
A recent slew of
economic data out of the country showed that industrial production
had slowed to its lowest level since 2008.
Retail, investment,
housing — all the numbers pointed to a slow down. The Chinese
government responded by injecting about $81 billion into the top five
Chinese banks, a targeted move that isn't meant to be more than a
quick tiny jolt.
So conditions will
remain as they are, and for Chinese companies, those conditions are
bad and getting worse.
In a recent report
Morgan Stanley described a grim future for corporates, especially in
sectors like mining, property development, and industrials. The
picture is pretty bad all around, but these industries are the most
vulnerable given market conditions.
Companies in these
sectors are seeing lower profit margins, excess capacity, and eroding
pricing power. To make up for that, they're spending too much cash
while levering up.
China's corporates
took on 5.4 times more leverage than they had before in the first
half of 2014 alone, according the Morgan Stanley's report, bringing
leverage up to levels unseen since 2006.
What may be the
worst part of this is that Chinese companies are trying to avoid this
to no avail.
"The
deterioration is also, for the most part, unintentional: debt
growth has generally been decelerating, reflecting slower
spending (yes, there are exceptions), but it’s just not
enough," said the report.
This isn't
sustainable, especially with the Chinese government insisting that
it's not going to rescue the economy with big stimulus anymore. On
Tuesday the government's publication, Xinhua News Agency, accused
those calling for fresh stimulus after the weekend's bad data dump of
"failing to clearly see the Chinese economy's new normal."
That means credit will
be tight, and Morgan Stanley thinks that puts Chinese companies in a
similar, terrible position to the one they were in in 2008 and 2011.
"Both periods saw
decelerating growth and were preceded by tightening credit
conditions," said the report.
So expect defaults,
expect credit events, expect strong companies to survive in this
environment and weak companies to get wiped out.
In fact, as you can
see in the Morgan Stanley table below, it's already started.
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