‘Vampire’ Chinese firms inflict losses on banks

BEIJING / Bloomberg

The Chinese economy is pock-marked with companies that can’t pay their bills and survive only with government help. Jiangshi, the
Chinese call them — ‘vampire companies’ or ‘zombies’.
These ghoulish companies and their debts are hindering the world’s second-biggest economy and will likely do so for years. Companies that miss debt payments inflict losses on banks, which then find it hard to lend even to solid companies. By propping up vampire companies, the government can weaken the entire economic ecosystem.
All of which helps explain why the global economy is sputtering and why investors have been gripped by panic.
“It’s undoubtedly a very serious problem,” says Charles Collyns, chief economist at the Institute of International Finance. “The Chinese so far have been very reluctant to let market mechanisms work their way.”
On Friday, as finance ministers and central bankers of the Group of 20 major economies began meeting in Shanghai, Zhou Xiaochuan, head of China’s central bank, insisted that Chinese authorities closely monitor debt loads. Even so, he said he expects China’s economy ‘to grow at a moderate-to-high pace’.
The debt buildup is vast. Chinese corporations (excluding financial companies) had amassed $14.5 trillion in debt by mid-2015, up 4½-fold from eight years earlier, according to the McKinsey Global Institute.
That debt equaled 131 percent of China’s gross domestic product, up from 76 percent in mid-2007. That’s nearly double US corporate debts’ share of US GDP, McKinsey says.
China’s total debts — everything owed by corporations, households, government and financial firms — climbed from $6.6 trillion in mid-2007 to $31.9 trillion by mid-2015. It equals 290 percent of China’s GDP, McKinsey says — astoundingly high for a still-developing economy.
When banks lend with a frenzy, they tend to make blunders as they shovel money to companies that can’t repay. Buried in bad loans, banks tend to curtail the credit that’s vital to growth.
For years, China’s debts remained fairly stable. But they surged after Beijing delivered a huge stimulus program in 2008 to fight the global recession. Under orders, state-owned banks pumped out loans. And local governments piled up debt to finance the construction of low-income apartments, roads and other projects meant to juice growth.
By keeping China’s economy humming, the stimulus programme helped energize the global economy. And it added little to Beijing’s own debt because it appeared on the books of banks and state-owned companies. Some loans financed factory construction in poor regions or development in areas with disadvantaged ethnic groups. Now, the debt is returning to haunt China.
Still, the debt isn’t likely to ignite a financial panic like the one that paralyzed Wall Street in 2008 and closed Greek banks. China won’t have to beg foreign creditors for a bailout in exchange for growth-killing spending cuts and tax hikes.
“This is not a Greece-like situation,” says Susan Lund, a partner at the McKinsey Global Institute. “Only 5 percent of Chinese debt is owed to foreign creditors.”
Beijing has enough money to absorb a load of bad debts and avert a catastrophe. Yet the debts will likely hobble its economy for years. The problem, says Ruchir Sharma of Morgan Stanley Investment Management, isn’t just the magnitude of the debts. It’s also the speed with which China accumulated them.