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“The palest ink is better than the best memory.” China’s vast lexicon of idioms is replete with reverence for the reliability of the written word. But the country that started writing on oracle bones more than 3,000 years ago finds itself the victim of a dangerous information gap.
A wholesale breakdown in the reliability of financial information is exacerbating the misallocation of capital that lies at the root of China’s waning economic efficiency and burgeoning levels of corporate debt. Consider, for instance, how a Chinese financial institution might try to find accurate information on a company that it is considering for a loan. As a first option, it might turn to media reports. This could turn out to be rash. The articles it finds may have been influenced by “envelope journalism”, a practice that involves slipping cash into envelopes for journalists at press conferences to foster positive feelings. So prevalent are such activities that a Chinese company offers an Uber-style app to make the planted news industry more efficient. The app, called “Zhao Jizhe” (Find a Journalist), puts companies in touch with journalists for hire, using a graduated scale.
In the same way that Uber customers pay more for a Mercedes with a leather interior than they do for a Honda Accord, the app lists charges from Rmb1,000 for a “standard” journalist who can reach only one outlet, Rmb3,000 for “mid-level” and “high-level” writers, and Rmb8,000 for a premium service that procures a “senior” journalist and guaranteed coverage in 25 publications, four of which are well-known.
The app, which claims to have a network of more than 1,000 journalists and access to 3,000 publications, calls itself an “intellectual community platform where media professionals help entrepreneurs”. Nevertheless, it appeared to be frozen this week amid criticism of its business model on baidu.com, the Chinese search engine.
If the media cannot be trusted, then where should a Chinese lender turn? Credit rating companies present an obvious avenue. So Panglossian are Chinese raters, however, that they betray not a scintilla of disquiet even in the face of a recent warning by the International Monetary Fund that some $1.3tn in corporate loans are at risk of turning bad.
China’s rating agencies have awarded investment grade status to 99.5 per cent of all public debt outstanding, according to a study by Wind Information, a Shanghai data provider. This sends a signal that all but a fraction of corporate debt is safe to hold, despite a surge in corporate defaults this year to triple the levels seen in the whole of 2015.
The absurdity becomes even clearer at the micro level. Yanzhou Coal, a struggling former stalwart with soaring debt multiples that managed to eke out a return on assets last year of just 0.1 per cent, is accorded a top rating for creditworthiness by Chinese agencies. By contrast, Standard & Poor’s, the international rating agency, puts the company into a “junk” category. There are scores of similar cases.
Stock market analysts are no less upbeat. They have assigned virtually unanimous “buy” recommendations to investors on all companies in the Shanghai Composite index, the country’s leading stock index. A Bloomberg scale shows an average rating of 4.4 where 5 represents unanimous buy calls from analysts.
The wall-to-wall optimism robs Chinese lenders of their antenna. If all is held to be well in the best of all possible worlds, it is difficult for financial institutions to tell a value-destroying zombie from a dynamic business innovator.
Without quality financial information it may be difficult to address a misallocation of capital that has contributed to this year’s most startling economic statistic: that in the first quarter of this year, the world’s second-largest economy required four units of credit to generate a single unit of gross domestic product.
Nevertheless, Beijing does not appear ready to let a hundred schools of thought contend. A febrile political environment, intensified by rising tensions in the South China Sea, has made China’s leadership mistrustful of criticism and outspoken commentaries.
The state-run media has been instructed to sow harmony wherever it can, prompting the People’s Daily, mouthpiece of the Communist Party, to crow in its 2015 “public opinion report” about a “major increase in consensus online” in support of the party.
The danger for China, though, is that it may harmonise away its critical faculties, rendering it unable to lift itself from a morass of debt that has been swelled by poor lending decisions.