China Inc’s virus cure will worsen its condition (Fighting the coronavirus)

Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!

 China Inc’s virus cure will worsen its condition (Fighting the coronavirus)

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• Multiple weapons: Beijing's battle with coronavirus is being fought with many weapons, including quarantining entire communities, and helping the corporate borrowers whose businesses are up in smoke suddenly!
• Debt payment obligations: Chinese corporates have $99 b debt maturing onshore and $90 b offshore in 2020. So the govt. has to now offer bailouts (via new lines of debt) thereby crippling the weak financial system even more.
• The way it is unfolding: As factories remain shut down, there is no immediate reprieve visible. So earning will deteriorate for many months, and debt repayment will be hurt badly.

1. NPAs for Banks may shoot up to 8%
2. Local govts. are giving new tax cuts, lower borrowing rates, and employment incentives (so firing is less)
3. Banks are told to roll over debts

• From bad to worse: Chinese private sector was struck with a slowdown already by end 2019, before the virus hit. China is starting a new phase of "financial forbearance".

1. To help manufacturers battle the trade war with US, govt gave a stimulus package, that didn't work out
2. Receivables of large companies remain high
3. Most small and mid-size firms may simply die down in a few months financially

• What will happen: This new round of financial forbearance will make things worse, as some will tide over for a while, but the financially unviable would be kept alive. (making the system weaker)
• Vast ammunition: Beijing has many Banks, and Financial Institutions too, under direct control. It can carry out more financial forbearance, but the systme will get clogged with bad debt, and every additional yuan of credit will be less effective.
• An alternative: Maybe they can call in the insurance companies (huge balance sheets) and asset management companies. They know how to deal with stressed firms. They operate in real market (buying bonds, stocks...) and know markets better than banks. 
• The right thing to do: Xi Jinping must let the weak SMEs die down, who are actually suffering high operating leverage and huge short-term debts. Sadly, since they account for 80% of urban employment, it won't happen.
• SARS 2003 versus COVID-19 2020: That time, China was entering a supergrowth phase having just entered the WTO. 2020 is totally different. Coronavirus may kill not just humans, but the financial sector of China too.
• Summary : The financial response of Chinese govt. to the handicaps created by Coronavirus may handicap the entire financial system ultimately.

Read more on - Polity | Economy | Schemes | S&T | Environment

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.