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Don Weinland

Mainland companies and local governments are facing a cash crunch as regulators tighten their grip on off-balance-sheet financing channels.
Companies will extend their terms of payments with creditors and insolvencies are set to rise as they come up short on working capital, according to a report from Euler Hermes, the world's largest credit insurer by assets.
The warning from the Paris-based insurance giant comes on the heels of the biggest jump in the official non-performing loan ratio in a decade, among other signs that debt-laden firms are under pressure in an economy where growth is slowing.
Local governments are also coming up short on payments after the central government put curbs on their borrowing channels last year.
"The Chinese market is undeniably presenting warning signals at every level, from macro to micro, and requires close monitoring in 2015," the report said.
After five years of declining or stable numbers of insolvency cases in China, Euler Hermes predicted a 5 per cent increase this year to 2,760 cases.
The average number of days it takes companies to pay for goods and services bought on credit is also set to climb to 90 from 69 in 2011, demonstrating the increasingly long payment terms needed to finance working capital.
Strong restrictions on off-balance-sheet, or shadow finance, have reduced a once-ample supply of high-interest loans that companies used to replenish working capital and refinance bank loans. Euler Hermes said the tightening of these channels was likely to lengthen the time needed to pay creditors.
Since the beginning of the year, local governments have been restricted from borrowing through shell companies and asked to look to fledgling municipal bond markets as a new source of financing, a move that is hoped to rein in control over their debt but could prove disastrous for some distressed county finance departments.
The lawsuits of Pacific Construction Group, one of the mainland's largest private builders, highlight the risks facing local governments in a more tightly regulated financing environment.
Pacific Construction is reportedly suing six provincial governments for failing to pay for projects including road building.
Beijing's Huaxia Daily reported that the government of Ningjin county in Hebei province was 83 million yuan (HK$102.8 million) short on a payment last month.
"This news reinforces our view that the fiscal slide is the top risk China faces in 2015, and we will see cases of credit default related to government financing vehicles," Deutsche Bank said in a report.
Last week, China published the largest jump in non-performing loans in a decade and the slowest gross domestic product growth in more than two decades. The economy slowed to an annual growth of 7.4 per cent while the NPL ratio jumped to 1.64 per cent.
The average NPL ratio at commercial banks stood at 1.29 per cent at the end of last month, compared with 1.16 per cent in September.
Ratings agencies said large lenders should be able to weather further asset deterioration.
Moody's Investors Service said it expected the credit profile of banks to remain stable. But the rapid increase in asset deterioration in official data, which is believed to greatly understate the true extent of the problem on the mainland, has prompted new concerns that the overall financial sector could be headed for a crisis.
"We believe that a credit crunch in China, a more severe form of financial crisis, is a high-probability event, although the timing is difficult to predict," Bank of America Merrill Lynch said in a report yesterday.


China's financing curbs raise credit crunch fears

A sharp rise in the official non-performing loan ratio and a slowing economy have darkened the outlook for debt-laden firms. Photo: Reuters

Business

Economy

Global Economy

Mainland companies and local governments expected to face problems meeting payments on tighter watch on off-balance-sheet funding


Mainland companies and local governments are facing a cash crunch as regulators tighten their grip on off-balance-sheet financing channels.


China's financing curbs raise credit crunch fears

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Mainland companies and local governments expected to face problems meeting payments on tighter watch on off-balance-sheet funding

Mainland companies and local governments expected to face problems meeting payments on tighter watch on off-balance-sheet funding