First it was the banks and now, in a slightly less dramatic but possibly more potent warning to any investor who ever contemplated buying shares in a listed Chinese company, it’s the corporates. As the FT reports on Thursday:
Chinese regulators have imposed a partial ban on listed companies raising capital from equity markets to repay bank loans or replenish working capital, amid a general tightening of liquidity and official curbs on soaring bank debt in the country.
At least 34 companies, mostly in the industrial and real estate sectors, have cancelled or reduced plans to raise money through private placements or secondary offerings in recent weeks.
Many of those companies said their plans were vetoed by the securities regulator, which said they are no longer allowed to raise money for working capital or repaying bank debt.
What’s more, some companies, including some listed cement producers, said they had been ordered to abandon their fundraising plans because they are in sectors identified by the central government as “suffering from over-capacity”.
The move to restrict secondary issuance in the equity market reflects curbs on bank lending imposed last month after loans issued in the first two weeks of the year hit Rmb1,100bn ($161bn).
The government has also moved to limit IPOs by real estate developers and some industrial companies in efforts to curb a growing real estate bubble, regulate the flow of new bank loans and reduce overcapacity in some sectors.
All these moves come in response to fears of overheating in the Chinese economy and warnings about nascent asset bubbles after last year’s explosive growth in bank lending.
And yes, such draconian measures will rein in greedy property developers and fast-buck speculators. But they also close off almost every fund-raising avenue available to cash-strapped companies in certain sectors.
Already, as the FT noted in a separate report, China’s banking regulator has issued verbal “guidance” to all banks, imposing lending quotas and warning the most aggressive lenders to temporarily halt loans.
As of late January, at least two banks – Bank of China and Agricultural Bank of China – had ordered lower level branches to stop issuing loans to corporate customers without explicit approval from headquarters. And state media reported that Bank of China, the most active lender among the large state banks, had switched off its internal electronic loan approval system.
As for IPOs: even though a ban on new listings was lifted late last year, the authorities are now moving to re-tighten the recently loosened regulatory environment, amid ominous remarks about “irresponsible pricing”.
According to the FT, regulators are now considering intervening in the pricing of IPOs and may selectively reject IPO applications rather than halt them altogether.
One interesting upshot of all this – at least for the vast number of small businesses operating in China – was raised by commentator Michael Pettis, who recently wrote on his blog about “small loan companies” and the informal banking system. He explained:
One of the consequences of the renewed attempts to constrain credit growth may be to divert funding out of the commercial banks and into the informal sector, where there are neither loan caps or minimum reserve requirements. I presume “legalizing” these banks means bringing them into the regulatory fold.
Overall, though, the new policy of restricting corporate capital-raisings “will be revealed as extremely short-sighted if it results in companies going under because they can’t repay the banks or replenish working capital,” Fraser Howie, co-author of “Privatizing China“, told the FT, adding:
“This comes down to the question of regulatory interference in the market; how is anybody going to decide the price of a Chinese share if the regulator is forever deciding who can or cannot sell them?”
Needless to say, the capital-raising ban will not apply to the big banks, which are now planning how to raise the dwindling amount of capital they hold against loans.
First up, the reported plans of Bank of China for a mega-capital raising of up to $30bn will undoubtedly frustrate cash-strapped companies in sectors deemed to be suffering “over capacity”. As the Wall Street Journal reported on Jan 25:
Bank of China said in a statement Friday [Jan 25] that it plans to seek shareholder approval for a mandate to sell new shares amounting to not more than 20% of its existing Hong Kong- and Shanghai-listed shares, which could raise almost $30 billion based on the shares’ Friday closing prices. The Beijing-based bank also said it plans to issue as much as 40 billion yuan ($6 billion) of bonds convertible into Class A shares, which are traded on China’s domestic markets.
Just as well it’s not a cash-strapped cement company or manufacturer trying to repay bank loans and fund capital investment, then.
Related links:
China’s challenge – FT
Chanos: ‘We’re not calling for a China crash’ – FTAlphaville
Hard to extinguish speculators’ animal spirits – FTfm
Credit binge sparks inflation threat – FTB