Way out for Chinese economy: to choose short-term pain or long-term pain?
As for China’s excessive debt problem at present, there is a view that is to encourage more and more enterprises to finance through equity. Indeed, with regard to China’s economy, superficially equity financing can lower debt lever ratio, but it fails to solve the problem. The debt itself is not a problem; the fundamental problem is the asset corresponding to the debt.
Equity financing and debt financing are only specific organization form of financing; however, the key for a successful project is the asset - if it is bad asset, it will not change the bankruptcy fate of enterprises in the excess capacity situation no matter what kind of financing mode it is. However, the reason why Chinese enterprises can maintain the debt is that the government has implicit credit on many debts, which results in failure for reducing bad assets, as well as hoard of many bad assets in a lot of overcapacity industries.
Under this case, on one hand, we call for reform – for the time being, all that are bad will be source of China’s potential economy growth. On the other hand, I don’t think reform can solve all the problems. Now we talk less about to assume the pain. The pain means that: economically we must take efforts to reduce overcapacity and bad assets. Only in this way can resources be relocated to new investment opportunities that may bring development.
In past five years, America has experienced de-leverage and now its economy revives. However, it has undergone pain during those five years and the number of large companies bankrupted in America is bigger than the sum of other countries in the world. While there appears problem in Chinese economy, from the central to local, from the government to the public, all of them hold the same attitude that they expect to use even bigger assets to maintain certain fragile chain which may break. Besides, even though we can endure bankruptcy of certain number of companies, we have to prevent systematic financial collapse, which is very difficult. Therefore, I think a possible choice for the government in the future may still be avoidance of the pain and continue to walk forward by maintaining the present situation.
However, if we go on like this, it will be a chronic disease. For example, the problem like low return rate on enterprise investment can not be solved fundamentally. So more equity financing can not solve the problem. What’s worse, the boom of China’s equity financing is becoming a bubble. Why? Equity financing can function better only when the rights and interests of minority shareholders are under full protection. But for the time being, there still lacks relevant basic system in China and it may cause bubble if we promote equity financing. When the bubble bursts, it will deepen and expand the harms in the end.
The challenges Chinese economy are facing now can not be solved through a painless way, and we’re bound to assume pain from the central to local and from the government to the public; if we are reluctant to assume short-term pain, then we will have to confront a long-term pain.
