Bankruptcy fears grow in China

Apr 13, 2017, 08:50 am

By Hong Soon-do, Beijing correspondent, AsiaToday – Bankruptcy fears that have been hitting China for years are pressuring many small and large companies. If things go on like this, even healthy companies might collapse under a burden of fear itself. China needs to freshen up the atmosphere somehow to get its economy move again.

This atmosphere is related to the restructuring efforts of the economic authorities. It's because not only zombie companies are being eliminated, but it's also possible that some companies may be hit unexpectedly. According to Beijing sources familiar with China's business community on Wednesday, at least 3,000 companies nationwide are facing or soon to face such uncertain fate.

The harsh reality of uncertain financing should be also mentioned. As the financial authorities are tightening money, those companies that are healthy enough to survive are also suffering from shortage of funds. As a result, some companies that need to borrow money urgently are turning their eyes to non-banking sectors or private lenders. Many of them are even selling their property, such as real estate, at a dirt-cheap price to raise funds.

Soaring wages are also adding pressure to companies. Beijing, Shanghai, Guangdong, Guangzhou, and other large cities have been increasing wages by at least 10% every year. Furthermore, the prices of raw materials, such as coal, iron ore and paper have skyrocketed, making things even worse.

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A tasting corner of Huishan Dairy products. The Beijing-based company had been on the fast track with its aggressive marketing. However, its financial structure has deteriorated rapidly in recent years, and the company is now on brink of bankruptcy. It's a typical example of bankruptcy fears sweeping across China./ Source: Huishan Dairy website

The situation is threatening large companies as well. A good example would be Huishan Dairy, one of China's biggest dairy companies. The company recently received default notification from creditor HSBC for failing to resolve the debt of 10 billion yuan (US$1.45 billion). We could say it is practically very close to bankruptcy. Considering its insufficient assets compared to debt and its stock crash, it has little chance of recovery.

China's corporate debt is 165% of GDP. Besides, hidden debt is expected to be quite large. Considering various difficulties, the situation seems fatal. Unfortunately, it's likely that we'll see many Chinese companies go bankrupt.

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