China Economy

Top Shanxi official hosts investment ‘road show’ for struggling coal industry

But intervention by deputy provincial governor will disrupt ‘risk-based pricing’, analysts say

PUBLISHED : Wednesday, 13 July, 2016, 7:58pm
UPDATED : Wednesday, 13 July, 2016, 11:02pm

In a rare move, the deputy provincial governor of China’s Shanxi Province has led a group of representatives from nine local coal companies to Beijing, to lobby institutional investors for funding.

But analysts criticised the official intervention, suggesting it could muddy the waters, as China continues to make drastic cuts to capacity within its heavy industries.

Top of the agenda for Wang Yixin, vice-governor of China’s largest coal and coke producing province, was convincing investors to subscribe to bonds issued by “good-quality” coal enterprises.

Seven state-owned enterprises (SOEs) and two private-owned firms from the province’s struggling coal sector formed the group, which hosted an investment “road show” in the capital on Wednesday.

Wang said the provincial government “has a responsibility to campaign for local companies”.

“The cut in overcapacity will force out zombie companies, while good-quality companies will benefit from the process, he said, adding the Shanxi authorities supported the seven SOEs.

These companies’ solvency ability is declining with the years, with their profitability under significant pressure from sluggish demand
Research report issued by Everbright Securities, on Wednesday

Wang also noted companies based in Shanxi had a good credit record, and the provincial government will work with all firms to prevent default.

Analysts, however, viewed the plan to support certain companies, as making investment in the sector more difficult.

“Government intervention will disrupt risk-based pricing,” said one senior analyst with a Shanghai based brokerage firm, who asked not to be named.

“The central government’s determination to cut overcapacity will lead to pain for companies and local governments: that’s inevitable.

“This process confuses the situation. It raises questions on whether it is the market, or the administrative powers deciding which companies die out in future. Who is making these decisions?” he said.

A research report issued by Everbright Securities on Wednesday said the seven state-owned coal enterprises had cumulative debts of 1.19 trillion yuan (HK$1.38 trillion) by the end of 2015, almost the size of the annual gross domestic product of the region.

“These companies’ solvency ability is declining with the years, with their profitability under significant pressure from sluggish demand,” the report said.

China’s supply-side reforms, targeting industrial oversupply through restructuring, have been pushed since late last year by President Xi Jinping, and have been putting companies engaged in cyclical heavy industries, particularly, under the spotlight.

The country is aiming to cut 500 million tonnes of coal production capacity, and 100 to 150 million tonnes of annual steel production capacity over the next three to five years, to correct a massive industrial oversupply in both sectors.

Banks have also been tightening up on extending loans, leaving the prospect of investment into the worst-affected sectors increasingly less likely.

In early May, one of the seven SOEs involved in the Beijing trip, Shanxi Jincheng Anthracite Mining Group Co, offered AAA-rated five-year bonds at nearly double the yield of similarly-rated notes.

Coal companies are now facing 268 billion yuan of bond repayments, due by the end of this year, Bloomberg data shows.

By June 21, as many as ten Chinese domestic bond issuers missed interest or principal payments, and around double that number defaulted during the first four months of 2016.

The number of defaults so far this year has already exceeded that for the whole of 2015, according to ratings agency Standard & Poor’s.