Shutting down 'zombie' enterprises to cut financing costs

Shutting down “zombie” enterprises and carrying out overdue interest rate reform are keys to lowering the financing costs for private companies and improving the efficiency of China’s financial sector, says an article in the 21st Century Business Herald. Excerpts:

China’s small and micro private enterprises have been complaining about high financing costs for a long time. In response, the State Council rolled out policies twice, in late July and this month, to help solve the problem. The main steps include unblocking the financing channels and relieving the financial pressure.

Yet, it is far from enough. It is necessary for the central authority to call for direct financing and reduce the costs by cutting the links in financing.

The core cause behind the high financing cost may not only lie in the lenders’ difficulty in getting money. Authorities need to see who the main borrowers are and whether their performances justify the financial resources they possess.

According to the central authority’s policies, it is easier and cheaper for small and micro enterprises, and shanty house renovators to get loans from State-run banks. But some of the borrowers, instead of using the fund for their supposed purposes, lend the money to real estate developers again for higher returns. If the banks make extra efforts to supervise how their loans are used, they will have to pay higher costs.

The credit crunch is obviously recent one. The national new credit growth dipped to 385.2 billion yuan ($63.15 billion) last month, the lowest since January 2010. The social financing scale shrunk from 1.97 trillion yuan in June to 273.1 billion yuan last month, the lowest since November 2008. These changes indicate that shortage of credit has not been caused by short-term issues, but by structural problems of the market.

There are many “zombie” enterprises, which mainly resort to borrowing to overcome their business difficulties. They are wasting considerable financial resources, despite the high financing costs, without taking necessary actions to solve the fundamental issues concerning their management and production, which is key for their recovery.

Some real estate developers hope the government can carry out stimulus policies as it did in 2009. But the local governments cannot reverse the fall of the housing market this time, because the downward pressure comes from many sources, such as aging population, diminishing of marginal returns of the genuine saving ratio and declining share of consumption in gross domestic product,

The central government’s policies of implementing structural reforms and eliminating distortion are both to-the-point solutions. It is time now to weed out the zombie enterprises and dying projects, many of which are supported by local governments, to shun the systemic risks and the drop of marginal revenue ratio.

The decision-makers should make their policies and measures more clear and implementable to lower the whole economic system’s risk premium level.

In the long-run, a market reform of the interest rate is one fundamental solution to untie the distorted and entangled relations of the financial market, and let China’s financial sector better serve the real economy.