Indebted Chinese Companies Increase Pressures on Government
HONG
KONG — Sainty Marine Corporation started small, buying and selling a
few ships in the 1980s. But the state-owned Chinese company went on a
debt-fueled binge over the last few years, opening its own shipyards and
signing orders worth hundreds of millions of dollars apiece.
Now, heavily indebted companies like Sainty Marine are at the center of the economic troubles in China that have unsettled currency, commodity and stock markets of late.
Sainty
Marine just found itself in court, as one of China’s biggest banks
asked to dismantle the company to recoup overdue loans. Government
regulators are investigating the accuracy of the company’s financial
reports, its bank accounts have recently been frozen and its shares have
not traded on the Shenzhen stock market since August.
“It’s pretty dire,” said Matthew Flynn, a Hong Kong shipping consultant.
Shipbuilding
is part of a long list of Chinese industries, including steelmaking,
coal mining and auto, that borrowed heavily from state-run banks to
expand during the good years, helping to propel the country’s three
decades of double-digit economic growth. But growth has now slipped to
around 7 percent, and many companies are running low on cash.
Continue reading the main story
Lower Prices, Costly Debt
Falling prices, particularly those paid at the factory gate, have made it even harder for Chinese companies to cover their bills.
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It
is adding to concerns about the direction of the Chinese economy, which
has made global investors nervous and weighs on the price of oil. And
troubled companies like Sainty Marine are clouding the outlook.
For
years, state-owned companies could regularly mark up their prices to
help them pay their loans. As customers now pull back and deflationary
pressures set in, companies are being forced to cut prices, while facing
the same debt payments.
The
corporate crunch is clouding the government’s efforts to manage the
economy. To keep growth from falling off a cliff, authorities are
pushing a raft of stimulus measures, like building more high-speed rail lines and encouraging state-owned banks to keep lending.
But
ever more borrowing leaves China vulnerable, as company blowups add to
the pressures. Last year, total debts of all sorts in China — household,
corporate and government — increased by an amount equal to 12 percent
of the entire country’s economy. Overall lending expanded in December at
the fastest pace since June, figures released by the central bank on
Friday show.
Companies in industrial sectors, which accounted for the bulk of borrowing, are navigating a treacherous environment.
Low
or falling prices mean that companies need to sharply increase their
sales volume every year to have enough revenue to cover their debt
payments. But increasing sales is hard in a slowing economy.
China
is not the only country with falling producer prices. They are also
down in the United States from a year ago amid weak prices for oil and
other commodities.
What
makes China unusual is that companies are coping with sharply rising
labor costs. Blue-collar wages are up nearly 10 percent a year, as the
work force ages and more young people prefer white-collar jobs.
Overinvestment in many sectors is also resulting in too many factories
and other businesses chasing the same limited sales.
“The
combination of rising staff costs and lower prices is a real
challenge,” said Sabine Bauer, a senior director for financial
institutions in the Hong Kong office of Fitch Ratings.
Shipbuilders like Sainty Marine illustrate the litany of problems.
Up
and down the Chinese coastline, in harbors and along coastal rivers,
companies bought big plots of land, purchased cranes, and hired large
numbers of welders. China expanded from one-fifth of global shipbuilding
capacity in 2008 to two-fifths by last year.
Quality
control was a problem from the start. “In China, building what are
supposed to be two identical ships in two adjacent slips, you get two
different vessels,” said Basil Karatzas, a Manhattan ship broker. “In
Japan, they can build 10 ships and they are all the same.”
With
many Chinese shipyards dogged by complaints, competition was fierce.
Japanese and South Korean shipyards demanded 20 percent down payments
for orders, plus a guarantee from an international bank to pay the rest
of the cost if the buyer defaulted. Although Chinese shipyards demanded
the same deposits, they did not require the guarantees, and accepted
orders from what were effectively shell companies with weak finances.
That put Chinese shipyards at risk.
Graphic
Why China Is Rattling the World
China’s economy is faltering, prompting concerns that are now shaking global stock markets.
If
ship prices fell sharply, buyers could forfeit their deposits and not
pay for the rest of the vessel, leaving the shipyard stuck with the
project. As global demand for commodities withered in the last two
years, ship prices dropped more than 20 percent — and in some cases,
more.
For
the 58,000-ton bulk freighters that Chinese shipyards were churning
out, prices have plunged from nearly $30 million in 2013 to just $16
million now. Buyers who bought at the high end chose to forfeit their
deposits instead of paying for finished vessels worth less.
Chinese
shipyards are now littered with half-finished shells, like immense
steel earthworms cut in two. Many shipyards lack the money to complete
vessels and sell them at a discount that might allow them to recover
some costs.
Even
strong buyers are balking at completing deals. Sainty Marine has four
finished vessels that were rejected by Precious Shipping of Bangkok.
Precious Shipping backed away, in a dispute over the quality that has
triggered an arbitration case in London.
The
Bank of China, one of the country’s biggest commercial banks, pushed
Sainty Marine into court on Tuesday in the shipyard’s hometown Nanjing,
in Jiangsu Province. The bank requested the appointment of a liquidator,
as Sainty Marine is already overdue on $81 million in loans.
A
Sainty Marine official who gave only her family name, Ma, said that the
court had held hearings this week, but added that she was not aware of
any decisions. The bank and the court had no comment.
It is rare for state-owned banks to pursue debts so aggressively.
Authorities periodically send signals about shutting down such zombie companies.
“Zombie enterprises are not new, but as the economy feels downward
pressure, their seriousness and danger becomes evident,” People’s Daily,
the Communist Party’s main newspaper, recently said..
But
banks usually keep rolling over debts and lending more, particularly
for state-owned companies like Sainty Marine, where the controlling
shareholder is Jiangsu province. The government has been hesitant to
completely shut down companies, over fears that large-scale layoffs
might lead to protests.
The
shipbuilding industry, though, is in complete disarray, with dozens of
Chinese companies lacking any orders. The government, which has halted
export credits for the sector, seems determined to force some closings.
In other circumstances, a weaker currency might offer relief.
When
the currency drops, it makes imported goods more expensive. That helps
stave off deflationary pressures that hurt companies’ ability to raise
prices. It also makes labor costs look lower in dollar terms, which in
turn can help attract overseas investment.
Those dynamics are a big reason the Chinese government has been letting the renminbi fall.
But the currency is also challenging.
A
weaker renminbi could further dampen Chinese demand for imported
commodities, which are typically priced in dollars. As Chinese appetite
wanes, freight stagnates and shipping companies have even less need for
new vessels.
It’s
a disastrous situation for Sainty Marine. “Even for what’s in the order
books,” said Mr. Flynn, the shipping consultant, “people don’t want to
take delivery of the vessels.”
Indebted Chinese Companies Increase Pressures on Government
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