Everything China's Doing to Rescue Companies, and What's Working

(Bloomberg) -- First came the sweeping government pronouncements. Then the flurry of actions, all aimed at shoring up China’s capital markets and rescuing struggling private companies.

But are they working?

Weeks into China’s latest campaign to support the world’s worst-performing major stock market and address record defaults, there have been some successes: equities are far less volatile and more companies are selling debt at a lower cost. Analysts are not convinced that the efforts will offer a sustainable fix for the financing problems that drove entrepreneurs toward a cliff edge in the first place.

“There’s no miracle drug to cure this disease,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co. “Liquidity support will lift us out of a small-scale financial crisis and prevent bigger macro risks, but it won’t resolve the fundamental issue of financing difficulties for private and smaller firms.”

Everything China's Doing to Rescue Companies, and What's Working

Here’s a look at the support measures that China’s government, central bank and its lenders have taken in recent weeks to ensure the supply of liquidity in the financial system.

Pledged shares

China ordered its financial sector to address the risks associated with stock-backed loans, after the tumbling equity market triggered a rush of margin calls. Banks were told to stop liquidating pledged shares, brokerages set aside funds to help ease the funding constraints for listed firms, while insurers and mutual funds were called on to buy securities. Companies are also doing their part after regulators made stock buybacks easier. Local governments in Beijing, Shenzhen and Guangzhou have pledged their support.

The measures have helped arrest the downward spiral in Chinese shares, though sentiment remains muted. Brokerages, which provide most stock-backed loans, are preparing for losses by beefing up capital buffers. While their shares jumped 23 percent since an almost six-year low in mid-October, they’re still down 30 percent for 2018. Stocks in the tech hub of Shenzhen -- home to many privately-controlled start ups -- are having their worst year-to-date performance since 2008.

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More loans

China also asked large banks to increase their loans to private companies to at least one-third of new lending, or two-thirds for small and medium-sized banks. That’s the first time that regulators have given specific targets on private lending. It’s a big ask, and one that shareholders reacted badly to on Friday. The concern is that banks will have to do too much of the heavy lifting, potentially leaving them with even more souring loans on their balance sheets.

Credit hedging

China’s central bank helped revive a little-used hedging instrument that protects corporate bondholders against defaults, helping non-state companies sell debt. The People’s Bank of China said it would grant funding to financial institutions offering such tools, triggering a flurry of issuance for so-called credit risk mitigation warrants. Their popularity has brought down borrowing costs for firms like chemical producer Zhejiang Hengyi Group Co.

To be sure, credit spreads for junk-rated borrowers remain wide. There’s still concern that China’s worse-than-expected economic slowdown will eat into corporate profits for the most vulnerable companies, analysts say. At least one investor said the high yields make China’s private debt attractive.

Equity tool

Signs of initial successes in the bond market have prompted the central bank to study ways in which similar tools can be brought to the stock market. The PBOC is asking financial institutions to come up with ideas, saying that it’s willing to provide funding to kick-start those programs. There’s been no detail yet on how such a measure would work, or how much money the central bank plans to set aside to fund it.

Swapping debt

China’s biggest state bank by assets is expanding its bond-to-equity swap program, throwing a lifeline to private firms who may not have the cash to meet interest obligations or repay bonds at face value. Industrial & Commercial Bank of China Ltd. reached initial agreements with 50 companies on the programs, six of which have kicked off.

Direct state intervention has helped Beijing Orient Landscape & Environment Co. access the bond market. The company, which recently said it will sell a 5 percent stake to a state-backed firm, successfully sold a note this month after struggling to issue a bond in May. Chinese regulators had already stepped in last month to stop liquidation of its pledged shares.

What’s next?

While the government’s quick-fix strategy has helped calm the panic for now, analysts at Nomura Holdings Inc. say China will need to do more in the coming months to support sentiment, adding that liquidity conditions remain tight. Making matters worse for China’s private sector is a record amount of debt that’s due to mature next quarter.

©2018 Bloomberg L.P.