China’s financial bailout promotes the survival of the fittest, leaving weak borrowers to fend for themselves
- China’s financial bailout for smaller private-sector firms is intended only for those with sound fundamentals
The Chinese government initiatives introduced recently are designed to help smaller, private companies that are commercially sound weather short-term liquidity problems, but will not do much to help weaker firms survive, analysts say.
This Darwinian selection between strong and weak firms – whether they are private or state-owned – is part of the middle path the government is attempting to navigate, stabilising the economy on the one hand while continuing its debt reduction campaign on the other.
For now, the Chinese bond market is recovering, after the introduction of a raft of government measures to help ease credit conditions for struggling private firms, but investors are wary on whether the progress can continue much longer, analysts said.
Despite the recent help for firms facing temporary liquidity problems, credit conditions for the weakest firms are likely to tighten, causing their corporate debt defaults to rise.
The People’s Bank of China (PBOC) said last week that it had established new tools to reduce credit risk, including the provision of new funding to financial institutions to support the issuance of corporate bonds.
The PBOC boosted its relending and rediscount quotas by 150 billion yuan (US$21.7 billion). Eligible financial institutions can apply for funding from the short-term liquidity facilities to increase their lending to small, privately owned enterprises.