August 10, 2017 / 3:38 AM / 8 days ago

Fitch: Bankruptcies to Keep Rising As China Tackles Overcapacity

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, August 09 (Fitch) Chinese bankruptcies are likely to continue to rise sharply as the authorities become more accepting of them and tighter financial regulations take effect, but market forces are still playing only a minor role in determining failures in the state-owned sector, says Fitch Ratings. There is little evidence yet that the government is willing to tolerate the job losses and the drag on economic growth that would accompany the bankruptcy of large "zombie" enterprises, which are responsible for the most significant corporate inefficiencies and account for the bulk of overcapacity. The number of Chinese insolvency cases rose to 5,665 in 2016 from 3,684 in 2015, and is on track for another large increase in 2017, with 4,700 case filed in January-July alone, according to data from the Supreme People's Court. Cases resolved are also rising, reaching 3,602 in 2016 - up by 43% from 2015 - and 1,923 in January-July 2017. The increase in insolvencies is partly policy-driven. China's authorities have become more accepting of bankruptcies in recent years, including in the state sector, and have made efforts to improve the insolvency framework. Allowing market forces to play a greater role in determining bankruptcies should, over the long run, reduce moral hazard. Meanwhile, resolution of zombie enterprises - those that incur recurring losses and rely on the support of the government and state banks to survive - would be a step towards improving corporate efficiency and addressing overcapacity. <iframe allowfullscreen src="//e.infogram.com/1c416592-9013-4190-a13b-3a37360ee13c?src=e mbed" title="Chinese bankruptcies Still Low" width="550" height="631" scrolling="no" frameborder="0"> However, bankruptcies remain infrequent compared with other large economies (see chart). This will not change quickly. Moreover, few companies in the sectors most in need of restructuring have gone the bankruptcy route. Only 12% of bankruptcies so far in 2017 involved companies in the highly indebted state sector; only 10% were from the real-estate sector, where the National Academy of Development and Strategy has classified 45% of companies as zombies; and only 2% were in the steel sector, where over half of companies are considered zombies and overcapacity is a significant problem. These figures contrast to some degree with official comments that have associated bankruptcies closely with supply-side reform. Premier Li Keqiang reiterated at the National People's Congress in March 2017 that market-based measures to promote restructuring and insolvency settlement are a key component of the state's strategy to deal with zombie enterprises. Meanwhile, the State-owned Assets Supervision and Administration Commission has drawn up a list of 2,041 zombie enterprises, mostly subsidiaries of central SOEs, and plans to resolve 345 of them in 2016-18. The authorities may continue to favour mergers of weak companies with stronger ones as a less disruptive alternative to outright bankruptcy for large enterprises, given that maintaining high and stable economic growth remains a primary policy target. Local governments are also likely to continue supporting troubled enterprises that are sizeable employers in their localities. SOEs employ over 60 million workers, but more than a quarter of them are unprofitable, based on official data. A concerted effort to wrap up non-viable companies would therefore almost certainly involve large-scale layoffs - the last major SOE reforms resulted in around 29 million job losses in 1997-2000. Layoffs of that scale are politically unpalatable, particularly because it may be difficult to absorb the affected workers into the industries of China's new economy. Sizeable bankruptcies would also add to asset-quality issues at banks. Bankruptcies are likely to continue rising quickly over the next few years in light of rising policy attention and the tightening of credit conditions since late 2016. The recent deceleration in credit growth also suggests firms will face slower growth next year, as reflected in Fitch's 2018 GDP growth forecast of 6.3% compared with the 2017 forecast of 6.7%. Contact: Andrew Fennell Director Sovereigns +852 2263 9925 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Buddhika Piyasena Managing Director Corporates +65 6796 7223 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below