China continues to press banks to extend credit to the private sector, and small and medium-sized companies especially. The latest move came Monday, when the central bank loosened some reserve-requirement rules for lenders. But President Xi Jinping’s team has also focused on shrinking the shadow-banking system, where credit decisions were made with less regulatory oversight and where it was easier to build up unsustainable leverage.
It’s that funding squeeze that explains the default surge that began in late 2017 and continues today. By contrast, 2016 was more a story of China’s push to shrink excess industrial capacity having reverberating effects in credit markets. “Short bond tenors mean the companies need to refinance frequently,” and weaker ones will likely have difficulty, analysts including Hong Kong-based Nino Siu at Moody’s Investors Service wrote in a note last month. “Banks are reluctant to lend to weaker companies. Additionally, shadow banking, on which weaker Chinese companies rely, continues to contract as the government tightens regulation,” she and her colleagues wrote.
One of the companies listed in the above article is Neoglory. I visited their headquarters in Yiwu about seven years ago. Mrs. Treacy had a tourist focused store at the time and was sourcing costume jewellery. Neoglory was the largest, splashiest company around and was one of our first calls. We never purchased from them because when it came to negotiating prices, they had a complex web of discounts and promotions. When we questioned the accuracy of a salesman’s calculation he said “that’s how I do math”. At that point we walked. That phrase has passed “that’s how I do math” is something we still smile about. It looks like we were not the only ones to walk away from the company.Click HERE to subscribe to Fuller Treacy Money Back to top