The Origin of China’s Stock Market Disaster? A Private Sector Starved for Credit

(Bloomberg Businessweek) -- Chinese stocks are among the world's worst performers this year. An economy that's growing at its slowest pace since 2009 and the U.S.-China trade war are certainly dragging them down, but there's an even bigger problem: The private sector—businesses not owned or controlled by the state—is broke. The government has initiated programs to keep businesses afloat, but they're unlikely to be enough.

The cash crunch is a side effect of Beijing's recent attempts to curb risky financial behaviors. What began last year as a crackdown on lending to heavily acquisitive conglomerates such as HNA Group Co. and Dalian Wanda Group Co. has spilled over to smaller companies, squeezing their access to funding. Already shunned by the big banks, these companies were further stung by efforts to regulate peer-to-peer lenders after Ponzi scandals shook the industry, cutting off a key source of ready cash. Still keen to tamp down borrowing, Beijing pushed up interest rates and slowed approvals of bond sales, while the state banks that are the main investors in China's bond market eased up on buying.

As bond defaults rose, the government attempted to inject more cash into the economy by easing reserve requirements on banks, promising to fund bond sales by private companies and reducing some personal income taxes to encourage consumer spending. Yet, with 11 percent of the Chinese stock market's capitalization pledged as collateral on business loans, 2 trillion yuan ($290 billion) of shareholder value is still at risk, according to a Goldman Sachs estimate.

With Chinese President Xi Jinping vowing “unwavering” support for the private sector, the prospect of a collapse seems to have been averted. In a speech at an import trade fair in Shanghai on Nov. 5, Xi pledged to continue opening the Chinese economy by cutting import tariffs and importing more than $30 trillion worth of goods and $10 trillion of services in the next 15 years. Any gains from increased imports are likely to accrue to state-owned firms, however. Already, the trade war is squeezing private manufacturers in the global supply chain, forcing many of them to move production outside China.

The central government is encouraging state funds to bail out businesses with the most exposed stock, which local governments in Shenzhen and elsewhere have begun to do. Limits on equity investments by insurers have been removed, and 11 government-owned brokerages are creating a 100 billion-yuan asset-management plan to buy some of the stock sitting as collateral.

But private enterprises still lack a permanent source of funding in a country where government companies enjoy generous subsidies and always get first dibs on credit. Citigroup Inc. analysts in China released a report on Oct. 31 finding the government's measures far from adequate to fully restore the private sector. And that stock bailout? Done by state bodies, it amounts to partial nationalization.

China's central government is itself strapped for cash because of the slowdown, but it has a big incentive to come up with more funds: Privately owned businesses are responsible for 31 percent of urban employment, 50 percent of tax revenue, and 44 percent of exports, according to Citigroup. They provide more than 80 percent of jobs nationwide, says Xinhua, China's official news agency. Without access to credit, the average private Chinese business won't survive. —Gopalan is a finance columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net, Howard Chua-Eoan

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