On Friday, the Nikkei Asian Review ran a story that contained some rather disconcerting statistics gathered from a joint survey of 1,506 small- and medium-sized businesses in China. The poll was conducted by Tsinghua University and Peking University.
Although pretty much every figure cited in the piece was alarming, the number that perhaps best conveyed the severity of the economic storm bearing down on China’s SMEs was the percentage who indicated they could survive longer than three months with current levels of cash on hand.
That figure: Just 15%. Got that? Assuming the sample is representative, 85% of Chinese SMEs will run out of cash within three months.
Among the myriad additional statistics cited, one-third of survey participants suggested the coronavirus epidemic will probably shave half or more off their full-year topline.
You don’t need an MBA or a PhD in economics to understand what the problem is.
These businesses have expenses, and if your access to credit is constrained (in China, the yearslong de-leveraging push and banks’ generalized preference for lending to state-owned enterprises due to the government guarantee, means SMEs have a harder time accessing funding), you have to rely on operating income to make rent, pay employees and service existing debt.
Of course, it’s hard to generate operating income when you aren’t operating, as many sectors of the Chinese economy still aren’t – or at least not at full capacity.
“Despite accounting for 60% of the economy and 80% of jobs in China, private businesses have long struggled to tap funding to help them expand during booms and survive crises”, Bloomberg wrote Saturday, in their own take on the subject.
China’s Association of Small and Medium Enterprises posted a tragically amusing set of recommendations for SMEs in the face of this national disaster. The bulletin mentions the dire figures from the same survey on the way to listing ways businesses might go about weathering the storm.
The Nikkei Asian Review cites the lead author of the survey, Zhu Wuxiang, a professor at Tsinghua University’s School of Economics and Management, as follows:
The longer the epidemic lasts, the larger the cash gap drain will be. Self-rescue will not be enough. The government will need to lend help.
Right. And don’t forget, some of these businesses were already struggling thanks to the trade war and the above-mentioned de-leveraging push which, despite the best efforts of policymakers, has at times constrained funding to the real economy, even as it’s worked to squeeze unproductive credit out of the labyrinthine shadow banking complex.
Nikkei’s piece is chock-full of anecdotes, including the story of a factory owner named Richard Leung, who, after restarting operations, had to close up shop just 48 hours later due to concerns about the virus.
On Standard Chartered’s latest estimates, the epidemic may affect more than 40% of China’s output, a quarter of which is comprised of a direct hit to demand (the rest from supply chain problems).
Beijing has repeatedly promised to do what’s necessary to cushion the economy and even before the COVID-19 outbreak, officials and policymakers were keen on supporting SMEs through various monetary and fiscal initiatives.
One problem, though, is that if you can’t open your business, most stimulus measures are by definition useless. As one local in Hangzhou told Nikkei, “A tax reduction doesn’t help if you don’t even have income”.
That echoes my assessment from Saturday, when I gently noted that “none of these stimulus efforts are going to matter if people are confined to their homes or otherwise frightened of engaging in economic activities, whether going out to eat, shopping or even refusing to go to work”.
Still, you have to believe Beijing will do anything and everything to avoid an apocalyptic situation for SMEs, if for no other reason than allowing widespread failures would lead to massive job losses, which could, in turn, foster social instability.
The government is allowing for the issuance of “anti-epidemic bonds”, which, as detailed earlier this month, are being used at least in part to roll existing debt.
The following simple chart shows the total amount of special purpose bonds issued by 10 Chinese corporates through February 10, and the breakdown of how the funds are being allocated.
But in a true testament to my characterization of this as a “Jaws” moment for China (i.e., “You’re gonna need a bigger boat”), Bloomberg on Saturday noted that although Chinese banks had offered “about 254 billion yuan in loans related to the containment effort as of February 9… China’s small businesses typically face interest payments on about 36.9 trillion yuan of loans every quarter”.
China is, of course, coming off a second straight year of record onshore defaults.
And, for the punchline (or “insult”, depending on how you want to look at it), I’ll leave you with the following from S&P:
S&P Global Ratings said Chinese banks’ nonperforming loan ratio could almost double in 2020 in the aftermath of the coronavirus outbreak, in a worst-case scenario that assumes the outbreak does not peak until April and the country’s economy grows by 4.4%, among other things.
In its baseline scenario, S&P expects China’s sector-wide commercial bank gross NPL ratio to peak at about 6.0%, if the outbreak will stabilize in March with virtually no new transmissions in April. The increase in bad loans could trim about 350 basis points off the sector’s core capital adequacy ratio of 10.9%, assuming the banks fully provision for new NPLs during the period. The provision coverage could fall to 58% from 186% in the fourth quarter of 2019.