China’s action on corporate costs shows commitment to reform
Analysts see State Council’s drive to ease companies’ financial burdens as a step toward reigniting mainland growth
A raft of new government measures aimed at stimulating China’s economic growth by reducing costs for companies signals a commitment to “meaningful” private sector reforms, according to analysts.
The plans, announced August 22 by the State Council, include reducing corporations’ annual tax bills by more than 500 billion yuan, lowering utilities and logistics costs for industrial companies and raising credit support to smaller firms.
Heavily indebted companies will be encouraged to enter debt-to-equity agreements with creditors and banks will be supported in replenishing capital and writing off bad loans in a timely manner. Companies with a good credit record will be encouraged to sell bonds overseas.
“The policy measures are not entirely new but are an added signal of commitment to define, refine and carry out private sector reforms in a meaningful way,” said Christy Tan, head of markets strategy at National Australia Bank, in an August 29 report entitled Essential Asia.
“Downside risks to growth have finally triggered some action from China’s central government. The calls for growth-supportive fiscal measures have gone on for a while and we have been saying that after the slew of monetary easing, the central bank has been seeking complementary measures from the government.”
Shen Jianguang, chief Asia economist for Mizuho Securities Asia in Hong Kong, said the new policy drive shows the Chinese government is determined to alleviate the corporate sector’s financial burdens.
“The cost cut now looks very urgent for Chinese companies especially in the current situation when China’s private investment growth continues to slow,” said Shen. “The reduction in financing costs, which is emphasised in the plan, may prove to be an effective way to boost China’s private investment.”
However, Shen said he does not expect all Chinese companies to benefit directly from the plans.
“The bad performance of some companies derives from structural problems within China’s economy, we cannot expect to a great improvement just by producing a policy,” he added. “To what extent the plans release the pressure on companies mainly depends on individual corporate performance and differences between sectors.”
As uncertainty over the timing of a probable US interest rate hike continues to subdue the yuan and other Asian currencies, Tan sees a near-term reprieve for the Chinese currency.
“The gap between the CNY and USD index has not narrowed meaningfully, leaving ample room for CNY appreciation should risk appetite pick up or concerns over global contagion taper off,” she wrote in her report.
Tan described recent trade data from China as showing “continued softness, but hardly a cataclysm”, and said there had so far been minimal impact from the UK’s decision to leave the European Union.
According to her breakdown, Chinese exports to the US slipped 2 per cent in July year-on-year, a “huge improvement” from the 10 per cent decline in June. Exports to the EU declined 3.2 per cent in July , slightly better than June’s 3.6 per cent drop, while shipments to the UK fell 2.7 per cent compared to an 8.8 per cent drop the previous month.
Tan noted that demand for oil, copper, coal and natural gas all fell noticeably in July.
“We assessed the sensitivities and vulnerabilities to China’s growth risks from trade and investments perspectives,” Tan wrote. “We concluded that the north Asian economies of Korea and Taiwan are more dependent on Chinese import demand but Singapore and Malaysia are also fairly dependent.”
She believes there is increasing consensus in the markets that China will refrain from cutting rates in the near future, and described a dramatic rise in the growth of M1 - the most liquid parts of the money supply, including physical currency and assets easily and quickly converted to cash - as “increasingly concerning”.
Tan wrote: “It appears that the preference for cash holdings has been rising steadily and this could be individuals or corporates lying in wait for better investment opportunities, or being increasingly cautious over China’s growth risks. On the other hand, it could also mean that property developers may be receiving more down payments for property purchases.”