19 Feb 2016
China: Industrial restructuring, China style – ING
Tim Condon, Chief Economist at ING, thinks that the massive increase in Chinese credit in January reveals that the government prefers the grow-into-it approach to industrial restructuring.
Key Quotes
“Eight ministries, including the PBOC, the MOF, the CBRC, the CSRC and the Ministry of Commerce, issued a circular containing six proposals for financial support for industrial restructuring in the auto, iron and steel, nonferrous metals, building materials, shipbuilding, coal and other industries. We read the news in the context of the massive credit increase in January and the report that the CBRC plans to lower banks’ NPL provision coverage ratio to 120% from 150% (latest 181%).
The six proposals are: strengthen monetary and credit policy support and create a sound monetary and financial environment; increase capital market and insurance market support for industrial enterprises; promote industrial innovation in corporate financing; promote mergers and reorganization; support the “going out” policy; and strengthen risk prevention and coordination.
The tension between the Anglo Saxon and the grow-into-it approaches to industrial restructuring is evident in the circular. Under the risk prevention rubric the circular identifies the exit of “zombie” corporates and the maintenance of safe bank capital levels, which are on the face of it at odds with one another.
We think the massive increase in credit in January reveals that the government prefers the grow-into-it approach to industrial restructuring. It takes advantage of China being a continental economy; like the US and unlike small economies, China has room to grow the market. The size of the market determines the gains from trade and the option value of future use of many investments now deemed excessive may exceed the maintenance cost.”
Key Quotes
“Eight ministries, including the PBOC, the MOF, the CBRC, the CSRC and the Ministry of Commerce, issued a circular containing six proposals for financial support for industrial restructuring in the auto, iron and steel, nonferrous metals, building materials, shipbuilding, coal and other industries. We read the news in the context of the massive credit increase in January and the report that the CBRC plans to lower banks’ NPL provision coverage ratio to 120% from 150% (latest 181%).
The six proposals are: strengthen monetary and credit policy support and create a sound monetary and financial environment; increase capital market and insurance market support for industrial enterprises; promote industrial innovation in corporate financing; promote mergers and reorganization; support the “going out” policy; and strengthen risk prevention and coordination.
The tension between the Anglo Saxon and the grow-into-it approaches to industrial restructuring is evident in the circular. Under the risk prevention rubric the circular identifies the exit of “zombie” corporates and the maintenance of safe bank capital levels, which are on the face of it at odds with one another.
We think the massive increase in credit in January reveals that the government prefers the grow-into-it approach to industrial restructuring. It takes advantage of China being a continental economy; like the US and unlike small economies, China has room to grow the market. The size of the market determines the gains from trade and the option value of future use of many investments now deemed excessive may exceed the maintenance cost.”