Chinese State Firms' Debt Hits New All Time High, As Profits Tumble

Tyler Durden's picture

Overnight China's finance ministry reported the latest data on state-owned firms profitability. At a cumulative CNY 2.04 trillion (or $316 billion) for the January-November period, this was another nearly double digit decline, or -9.5% from the year ago period, following a -9.8% drop for the 10 month period the month before.

State-backed financial companies, which in China is redundant as all financial companies are state-backed, were responsible for roughly a third of the cumulative profit decline: excluding financial firms, combined revenues of state-owned firms fell 6.1% in the first 11 months from a year earlier to 40.7 trillion yuan, the ministry said.

According to Reuters, companies in transportation, chemical and power sectors reported a rise in profit in the January-November period, while firms in oil, petrochemicals and building materials - or a vast majority of them - saw a drop in earnings. Firms in steel, coal and non-ferrous metal sectors continued to suffer losses.

"The downward pressure on economic operations remains relatively big, although there are signs of warming up in some indicators," the ministry said.

This optimism is, however, entirely baseless and we are confident that Chinese corporate profitability is set to go from bad to even worse. The reason for that is that at current commodity prices and production, virtually all of China's steel industry is loss-making, while over half of commodity companies with debt do not have the funds to make even one coupon payment.

While the logical response to plunging profits would be for the government to enforce a strict discipline for excess capacity reduction, Beijing has been unwilling to do this, afraid of the outcome from the resulting surge in corporate defaults.

As Credit Suisse notes, "although we have seen more default announcements since (including three SOEs) [the March 2014 first ever corporate default of Chaorisolar], both the number and magnitude of Chinese defaults are lower than one would expect (only seven this year) given the size of the corporate sector, Chinese debt market and scale of uneconomic production, particularly in basic material industries. Of 17 bond defaults since then, only four involved SOEs. In fact we only find three unresolved defaults (Tianwei, Yingli and Sinosteel), and of these only one (Tianwei) resulted in a closure of capacity."

CS' conclusion is that China, like Japan back during its peak bubble days, is operating a policy of employment maximisation at the expense of profit maximisation, and therefore appears unwilling to shut down excess capacity. This assures a continued decline in profits.

Meanwhile, as SOE profits continue to deteriorate at the expense of maximizing jobs and employment (recall the biggest threat facing China is a working class insurrection, or simply said, "lower and middle-class revolution") debt at these same SOEs just hit a new record high: according to the same FinMin numbers, total SOE debt rose by CNY393 billion to CNY78.3 trillion, or over $12 trillion - well above 100% of total Chinese GDP.

While hardly as dramatic as the unprecedented CNY5.9 trillion surge in September (duly noted in "Did Something Just Snap In China: Total SOE Debt Rises By $1 Trillion In One Month"), the trend of declining profits (and cash flows) coupled with debt rising to new record highs month after month, assures a head-on collision with financial reality which will leave many debtor and creditor casualties, both metaphorically and literally.

The question, just like the main question involving the US stock market, is how much longer can this unsustainable divergence continue?

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HedgeAccordingly's picture

Peking Duck!

*BlackRock saw yuan depreciation as wakeup call for China debt hedging
http://hedgeaccordingly.com/2015/09/blackrock-sees-yuan-depreciation-as-...

Dragon HAwk's picture

Sooner or later somebody is going to realize that THEY are the person who is not going to get paid back.. So i guess that is what government is striving for. Money creation, without anybody expecting to get paid back.. win win..

  No Interest paid, no pay back, they control the spigot. perfect scam ( oh wait that's the US ) This is China

bugs_'s picture

googles "profit"

commie's picture
commie (not verified) Dec 25, 2015 2:35 PM

Interesting that both China and Japan are concerned over the wellbeing of the worker class while the US has no regard at all and the sheeple duefully submit. 

CheapBastard's picture

Even Newt sees this clearly and writes about it in his book. Only special interest groups and the FSA matter to DC anymore. The middle class is largely ignored. That's why 'lower taxes' Trump is so strong and Hitlery "raise taxes" Clinton is falling behind.

lasvegaspersona's picture

In China 'hunger' is being hungry,in the US it is 'living in a food desert'.

People don't riot just because all they have to eat is junk food. When they can see their kid's ribs though....

tarabel's picture

 

 

I am not particularly interested in a paternal government looking out for my welfare and telling me what I need to do in order to achieve it. So I say happy days to the state power advocates over there. It merely gives us the edge and perpetuates the millenia of submissive human servitude which characterize their corrupt kleptocracies. Not for me, thank you.

And what's all this about the US being full of sheeple? As if Japan and China are full of citizens plotting the overthrow of their respective governments.

The US population is arming itself at a furious rate and piling up non-perishable food and basic supplies nonstop.

Inner city blacks are on the march against what they perceive to be an oppressive government that plays favorites.

College kids, however deluded they may be, are nevertheless pushing for change. 

US politics is rife with outsiders pounding on the gates.

One financial spark will set the whole pile of gunpowder off worldwide. When that happens, you want to be in Japan, China or the USA?

 

sun tzu's picture

All those groups are fighting each other, not the corrupt government and thieving bankers. 

roddy6667's picture

In China, 25% of the population is below middle class. this includes blue collar, urban poor, and rural farmers (almost all poor). 25% are above middle class.

50% are middle class.

All three groups know they are better off than 10 or 20 years ago. They also believe their leaders are making the right decisions.

In America, the middle class is where it was in 1967, as far as income. There is no reason to believe it will not decline more.

Which one is doing more for its people?

Dr. Bonzo's picture

You just make this shit up?

http://qz.com/581080/the-best-one-star-yelp-holiday-reviews/

Chinese middle class is barely 20% of their population by the most conservative estimates.

Second, in Asia, to achieve an "American standard of living" on terms WE understand, you have to be a fucking millionair.

You've obviously never set a foot in Asia.

And BEFORE the commies were "doing more for its people" they were fucking murdering them. Lastly... the commies aren't "doing" anything "for their people." They've simply stepped aside and stopped trying to micromanage the economy, this allowed commie cronies to setup massive sweatshops, steal peasant land, swap useless yuan for US Treasuries and counterfeit their way to prosperity leveraging land theft and slave labor and counterfeit currency.

If you love China so much go fucking live there, but stop spewing garbage numbers to prove some point. We all know we're in steep decline. What are you advocating, how awesome the fucking commies are?

SMH.

 

NoDebt's picture

When the debt bomb finally goes off it will be like a planet-killer asteroid.  Won't matter where it hits, it'll take the whole world economy down with it.  China, Japan, US, Euro-zone- won't make any difference.

 

tarabel's picture

 

 

I think of it as a series of dams on a river. First one fails, then the water sweeps down through the next and the next until a mighty wave of debris reaches the sea.

Stoonod Nicknud's picture

I welcome SMOD with open arms.

Gambit's picture

Me too... It is time for a reset.

CTG_Sweden's picture

 

The Chinese economy probably needs more debt to equity swaps although that doesn´t solve the malinvestment problem and similar problems.

sun tzu's picture

Trade worthless debt for worthless equity

CTG_Sweden's picture

 

sun tzu:

"Trade worthless debt for worthless equity"

 

My comments:

Yes, but companies tend to work better with worthless equity than with worthless debt. Companies that have emerged from debt restructuring through a debt-for-equity swap don´t need as low interest rate to prosper. Furthermore, other parts of the society benefit from normal interest rates.

 

 

 

newnormaleconomics's picture

The CCP state is the modern-day Stalinist- and Nazi-industrial states of the 1930s. The Anglo-American Power Elite were funding all sides in the 1930s in an attempt to determine which one would likely win in a winner-take-all competition for global dominance. The (so-called neoliberal) Anglo-American, militarist-imperialist, rentier-socialist, corporate-statist version has won, and there is no viable competition or alternative hereafter for the future fate of the human ape species on a finite, spherial planet. 

We're experiencing as good as it gets for human apes on this small, warm, wet rock orbiting an insignificant young star in a solar system and galaxy far, far away from the center of the known (and unknown) universe (multi-verses). 

We're higher-entropy, higher-order (if only slightly), self-organized stardust, my ZH bitchez. 

"No Time."

"Time of the Season."

"The End" (and, of course, the beginning for some other order of life, lower or otherwise . . . ). 

"The West is the best . . ." . . . "The End" . . . "Going into the West (LOTR)  . . . "the end of civilization" (Robinson Jeffers) . . . 

We're there . . . 

"Yeah, lookin' good! Everything is f&$ked up, as usual . . . "

 

Dr. Bonzo's picture

If Weimar Germany could have exported its hyperinflation how long would it have taken or German to collapse? That's China today. For every bump in the economy the Chinese just print more yuan and the shadow banks pump that shit into foreign property plays all over the world. This circus can go on for decades.

Dre4dwolf's picture

Old World:

Corporation uses new debt to borrow money to purchase new plant and equipment in order to boost production and sales and increase profit.

 

New World:

Corporation uses new debt to fuel stock buy backs and buffer stock valuations temporarily with the hopes it causes a rally so it can sell its own shares higher.

 

------------

IMO

Old World leads to prosperity

New World leads to short term gratification and long term pain

 

I AM SULLY's picture
I AM SULLY (not verified) Dec 26, 2015 9:28 AM

China will be fine ...

(they just need to make more cheap but dangerous hand-held pistol crossbows)

(and machete)

(and shivs)

(lots of shivs)

(growth industry)

https://www.youtube.com/watch?v=2xRAK0GWNLc