China’s private entrepreneurs are shifting away from investments in favour of paying down dollar debt and keeping cash at hand to brace for an economic downturn exacerbated by the Trump administration’s trade tariffs.
China’s official third-quarter gross domestic product data, due on Friday, are expected to show economic growth holding close to the government’s target. But other data — such as a slide in the Caixin China manufacturing purchasing managers’ index, and in dollar bond issuance from non-state-owned groups — suggest the private sector is nervous.
Clients in China “are concerned about the ongoing slowdown in the economy”, “pessimistic about the outlook for the yuan” and “pessimistic that an increase in US tariffs from 10 per cent to 25 per cent in January can be averted”, Mansoor Mohi-uddin, NatWest Markets’ head of forex strategy, wrote after a visit to Beijing last week.
Mr Mohi-uddin added that private exporters would focus their cash on repaying dollar debt, as China’s loosening policy and the US Federal Reserve’s tightening contributed to a weaker renminbi. Data from Refinitiv show that China’s private groups are pulling back from issuing fresh dollar debt, with new issues trending lower despite a seasonal spike due to refinancing in September.
China’s top private companies, including Alibaba and Tencent, have seen stock prices slide sharply this year. Smaller groups have been forced to sell out to state-owned rivals as their stock prices sink below the value of pledged shares, triggering margin calls and forced share disposals.
Private businesses have borne the brunt of a slowdown in real economic growth in China over the past few years, which has been accompanied by a tightening of state lending and the collapse of shadow financing networks. Private companies tend to be far more exposed to shadow financing, as both borrowers and lenders.
“This year, against the backdrop of the intensification of the US-China trade war, domestic macroeconomic policy is unclear and market participants’ risk appetite has contracted sharply,” according to a recent report from China Merchants Bank.
“I think the downside risks from trade tensions are significant,” Yi Gang, the governor of China’s central bank, said last weekend, according to Bloomberg. “Tremendous uncertainties [are] ahead of us.”
After decades in which property investment drove the Chinese economic boom, real estate entrepreneurs are turning to asset management rather than placing big bets on land or buildings, said developer Feng Lun, founder of property group Vantone. He is promoting an overseas Reit-like platform for retail investors together with Russian partners.
An executive at one of China’s largest private conglomerates said his group was battening down the hatches in expectation that the full impact of the trade tariffs would be felt in the next six to 12 months. Division managers have been told to keep cash on hand and ensure that liquidity is maintained across assets.
“China’s biggest problem is confidence. Everyone is pessimistic and that will make it worse and worse,” he said.
This is reflected in a recent slide in manufacturing PMI, particularly for the Caixin survey, which is heavily weighted towards private groups. The decline in the Caixin PMI has outpaced the official manufacturing PMI, which is biased towards state-backed groups.
In many ways what is happening today is a continuation of a trend. The slowdown in growth beginning in 2012 wiped out many private businesses in sectors suffering from overcapacity. Almost all of the 11,000 businesses that closed shop during 2016 to 2018 — the era of “ supply-side reform” — were private, according to the China Merchants Bank report.
But the closure of small private companies has fed the implosion in shadow financing schemes, including peer-to-peer lending platforms that raised money from retail investors for distressed borrowers — and that is now starving private groups of capital.
Chinese president Xi Jinping’s tour of north-east China in September only added to private companies’ sense of gloom. He visited the state farms and state-owned oil companies that were the bastions of the party state and ordered people not to “trash talk” state-owned enterprises.
State media threw in some comments about protecting private interests too, but Mr Xi’s choice of which ostensibly private company to visit did not reassure. He toured Zhongwang, the aluminium extruder whose sudden burst of exports to the US single-handedly triggered the imposition of anti-dumping duties on aluminium products that presaged much of today’s trade tension.
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