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Red envelope rain highlights Beijing’s dilemma amid weak economic outlook

Liquidity conditions for mainland companies tougher than imagined, analysts say

PUBLISHED : Wednesday, 03 February, 2016, 10:34am
UPDATED : Wednesday, 03 February, 2016, 10:34am

The massive amount of red envelope money given out by China’s central bank recently is not sufficient to quench long-term capital demand, analysts say, with mainland companies still craving more liquidity.

Last month, the People’s Bank of China (PBOC) carried out the biggest cash injection in more than three years through open market operations (OMO). By Monday, the capital it had pumped into the system through OMO, lasting until after the Lunar New Year, was roughly 1.09 trillion yuan (HK$1.29 trillion).

That’s more than 2.5 times the volume last year, Natixis said in a report issued last week, and more than new yuan loans by domestic financial institutions in December (610 billion yuan), or the 673 billion yuan in capital that could be released through a 50-basis-point cut in banks’ required reserve ratios (RRR).

However, OMOs alone “could not solve the fundamental problem that corporates, particularly smaller private companies need cheaper credit” Natixis senior economist Iris Pang said.

“OMOs are short term in nature, and because of this banks may not be able to transmit enough liquidity to the non-bank credit sector,” she said. “As a result, it could not solve the problem that the weakening China [economy] needs lower interest rates in the whole financial sector.”

Cash injected through OMOs, most of which are conducted through repurchase agreements, is typically short-term money. The repurchase agreements conducted in January mostly carry 28-day maturities, meaning the newly created money will be drained from the system this month.

Jiang Chao, an analyst with Haitong Securities, said liquidity conditions would be “severely challenged” when the newly created liquidity disappeared.

The interbank lending rates are still high in the mainland
Iris Pang, Natixis

“The strengthening of the US economy, and the expanded easing from Japan is putting more pressure on [the] yuan’s valuation,” he wrote in a note on Monday. “But it seems stabilising [the] yuan’s exchange rate has been prioritised, then it leaves very limited room for monetary loosening.”

The mainland last cut interest rates and banks’ required reserve ratios in October.

Analysts say that as long as the economy is growing more slowly, there is a longer-term need for additional liquidity to lower interest rates.

“As you can see, the interbank lending rates are still high in the mainland,” Pang said. “It is likely that so many companies and individuals are relying on bank loans to muddling (sic) through the spring festival. Things might be tougher than imagined.”

China’s manufacturing growth slumped to a three-and-a-half-year low last month, with the official purchasing managers’ index (PMI) reading 49.4, down from 49.7 in December.

Companies in traditional industrial sectors including steel, coal mining, machinery and shipping, are watching their balance sheets be eroded by big losses amid global headwinds for commodities and persistent oversupply in domestic markets.

According to pre-announcements for 2015 earnings reports, 33 per cent of listed state-owned enterprises (SOEs) will report losses, with another 55 per cent to report declines in profit, Securities Daily said on Monday.

Angang Steel, China’s fourth-largest producer, expects a loss of 4.4 billion yuan for last year, in contrast to a profit of 928 million yuan in 2014.

Meanwhile, China’s largest steelmaker, Baoshan Iron & Steel, said its preliminary 2015 net profit declined by 83.4 per cent year on year to 961 million yuan.

Pang said the situation for industry leaders could improve as the authorities pushed ahead with supply-side reform by cutting supply gluts and forcing out less efficient players.

“But the process should be very carefully handled because the manufacturing giants are usually bound with a wide reach of upstream and downstream players,” she said. “One collapse can lead to an earthquake.”

China’s private sector is doing much better, as the central government tries to steer the economy away from an investment-fuelled model to a more balanced, service- and consumption-driven growth pattern.

A total of 336 private companies reported an improvement in annual performance in their preliminary reports, accounting for almost 70 per cent of the companies listed on the Nasdaq-style ChiNext board. Eighty companies saw their earnings more than double, Securities Daily reported.

However, although the ChiNext Index has fallen almost 50 per cent from June’s peak, companies were still trading at an average price-to-earnings ratio of 82.28 by Tuesday, according to Shenzhen Stock Exchange announcements.

Data from the Shenzhen Stock Exchange shows turnover on the ChiNext board fell 23.93 per cent last week to 178 billion yuan, down 43.05 billion yuan from the previous week.

yu.xie@scmp.com

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