Qin Nan, the chief executive of a Beijing-based manufacturer, needs to borrow at least Rmb5m ($740,000) to expand production of his company’s air purifiers and air conditioners. But because his company lacks an equivalent amount of collateral in property and other assets, Chinese banks were willing to lend only Rmb2m.
“We didn’t have any more collateral to offer so [bank financing] was a dead end,” Mr Qin told the Financial Times. “We borrowed bridge financing from private channels at interest rates as high as 3 per cent a month [or 36 per cent a year] but paid back the money quickly.” He said he was now exploring “all possible channels” of additional funding, including private equity firms.
Mr Qin’s grievances, which he recently aired on social media, are increasingly common among private sector companies in the world’s second-largest economy, which have been hit by a squeeze on lending as Beijing has worked to reduce the economy’s dependence on debt-fuelled stimulus. If their complaints are not addressed, the consequences could be disastrous for Chinese officials as they try to avoid a precipitous deceleration in economic growth, which last year slowed to a 28-year low of 6.6 per cent, according to data released on Monday.
Non-state companies, including foreign-invested enterprises, account for more than half of total economic output in China, and anywhere between 50 and 90 per cent of tax revenues, spending on research and development, urban employment and exports.
But according to official bank data cited by Nicholas Lardy in The State Strikes Back, his most recent book on the Chinese economy, in 2016 they received just 11 per cent of new loans issued by the official bank sector, while more than 80 per cent flowed to state-owned enterprises. In 2012, the year before President Xi Jinping assumed power, private sector companies and SOEs received, respectively, 52 per cent and 32 per cent of new loans — with the remainder going to collectively owned groups and other companies that do not fit clearly into state or private.
This imbalance, as well as Mr Xi’s enthusiasm for ever bigger, stronger SOEs and his repeated admonishments that the Communist party is the “ruler of all”, have demoralised many private sector entrepreneurs and other proponents of bolder economic reforms.
Until recently, privately owned companies in China could survive by tapping funds from the country’s enormous shadow banking sector. But shadow financing began to dry up as Chinese officials, led by Vice-Premier Liu He, ramped up a campaign to stabilise debt at non-financial companies, which is estimated at about 300 per cent of GDP.
Mr Xi and Mr Liu appear to have underestimated US President Donald Trump’s willingness to launch an all all-out trade war with China, which has sapped investor and private-sector investment, and also their ability to force the country’s state-controlled banking sector to direct more lending to non-state companies.
“In an economy that is 50 per cent private, Xi cannot repress the private sector without limit,” said Andrew Batson, China research director at Gavekal. “It seems like we reached that limit some time in late 2018.”
An increasing number of influential economists now think that the officials driving China’s economy need to take pressure off the brake and instead feather the accelerator, albeit without resorting to “flood-like” stimulus measures that Beijing employed during the depths of the 2008-2009 global financial crisis.
“Yes we should try to stabilise the [overall] leverage ratio, but you can’t cut the [overall debt] ratio in a hurry,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences and a former central bank adviser. “That’s wrong. Growth is still very important for China. Without growth, everything will get worse. We can only tolerate a certain slowdown.”
Senior officials appear to agree. “We will keep the economy operating in a reasonable range, which means we allow economic growth to fluctuate,” Premier Li Keqiang said on January 17. “But there cannot be big ups or downs. It cannot fall off a cliff.”
In an extraordinary salvo earlier this month, Mr Li and Mr Liu visited staff at the Beijing headquarters of three of China’s four largest state banks, lecturing them on “inclusive finance” and the need to support small and medium-sized enterprises.
Mr Li and Mr Liu’s hectoring received blanket state media coverage. Within hours, China’s central bank, in an effort to stimulate such lending, announced an Rmb800bn ($117bn) cut in the level of reserves banks are required to hold.
Mr Li and Mr Liu’s admonishments came just two months after Mr Xi, in a similarly hyped meeting with some of the country’s richest entrepreneurs on November 1, pledged “unswerving support” for the private sector. In the weeks that followed that encounter, a financial regulatory commission headed by Mr Liu dispatched inspectors across the country to figure out why the credit “transmission mechanism” between state lenders and private borrowers was not working.
Wu Hai, founder of the Beijing-based Crystal Orange hotel chain, said one problem was that even when a bank’s risk control committee approves a loan, ultimate responsibility still rested with the loan officer who brought it to them. “If the loan defaults, it’s the loan officer who gets blamed,” he said. “So [loan officers] just follow the rule book.”
Like Mr Qin, Mr Wu had difficulty dealing with state banks because Crystal Orange rented rather than owned its hotel premises and could only borrow against its cash flow. Mr Wu instead sought outside private equity investors such as Carlyle Group, which became Crystal Orange’s largest shareholder before its Rmb3.65bn sale last year to a rival Chinese hotel chain.
Now flush with his own cash from that sale, Mr Wu is investing in a chain of upscale karaoke parlours and other ventures. Across town, however, a worried Mr Qin is still struggling to raise money, even as the country’s most senior leaders seek to reassure him and other entrepreneurs.
“It takes time for policies [supporting the private sector] to be implemented,” Mr Qin said. “So, for now, we do not feel at ease.”
