Indebted Chinese Companies Increase Pressures on Government
HONG KONG — Sainty Marine Corporation started small, buying and selling a few ships in the 1980s. But the state-owned Chinese company went on a debt-fueled binge over the last few years, opening its own shipyards and signing orders worth hundreds of millions of dollars apiece.
Now, heavily indebted companies like Sainty Marine are at the center of the economic troubles in China that have unsettled currency, commodity and stock markets of late.
Sainty Marine just found itself in court, as one of China’s biggest banks asked to dismantle the company to recoup overdue loans. Government regulators are investigating the accuracy of the company’s financial reports, its bank accounts have recently been frozen and its shares have not traded on the Shenzhen stock market since August.
“It’s pretty dire,” said Matthew Flynn, a Hong Kong shipping consultant.
Shipbuilding is part of a long list of Chinese industries, including steelmaking, coal mining and auto, that borrowed heavily from state-run banks to expand during the good years, helping to propel the country’s three decades of double-digit economic growth. But growth has now slipped to around 7 percent, and many companies are running low on cash.
It is adding to concerns about the direction of the Chinese economy, which has made global investors nervous and weighs on the price of oil. And troubled companies like Sainty Marine are clouding the outlook.
For years, state-owned companies could regularly mark up their prices to help them pay their loans. As customers now pull back and deflationary pressures set in, companies are being forced to cut prices, while facing the same debt payments.
The corporate crunch is clouding the government’s efforts to manage the economy. To keep growth from falling off a cliff, authorities are pushing a raft of stimulus measures, like building more high-speed rail lines and encouraging state-owned banks to keep lending.
But ever more borrowing leaves China vulnerable, as company blowups add to the pressures. Last year, total debts of all sorts in China — household, corporate and government — increased by an amount equal to 12 percent of the entire country’s economy. Overall lending expanded in December at the fastest pace since June, figures released by the central bank on Friday show.
Companies in industrial sectors, which accounted for the bulk of borrowing, are navigating a treacherous environment.
Low or falling prices mean that companies need to sharply increase their sales volume every year to have enough revenue to cover their debt payments. But increasing sales is hard in a slowing economy.
China is not the only country with falling producer prices. They are also down in the United States from a year ago amid weak prices for oil and other commodities.
What makes China unusual is that companies are coping with sharply rising labor costs. Blue-collar wages are up nearly 10 percent a year, as the work force ages and more young people prefer white-collar jobs. Overinvestment in many sectors is also resulting in too many factories and other businesses chasing the same limited sales.
“The combination of rising staff costs and lower prices is a real challenge,” said Sabine Bauer, a senior director for financial institutions in the Hong Kong office of Fitch Ratings.
Shipbuilders like Sainty Marine illustrate the litany of problems.
Up and down the Chinese coastline, in harbors and along coastal rivers, companies bought big plots of land, purchased cranes, and hired large numbers of welders. China expanded from one-fifth of global shipbuilding capacity in 2008 to two-fifths by last year.
Quality control was a problem from the start. “In China, building what are supposed to be two identical ships in two adjacent slips, you get two different vessels,” said Basil Karatzas, a Manhattan ship broker. “In Japan, they can build 10 ships and they are all the same.”
With many Chinese shipyards dogged by complaints, competition was fierce. Japanese and South Korean shipyards demanded 20 percent down payments for orders, plus a guarantee from an international bank to pay the rest of the cost if the buyer defaulted. Although Chinese shipyards demanded the same deposits, they did not require the guarantees, and accepted orders from what were effectively shell companies with weak finances.
That put Chinese shipyards at risk.
If ship prices fell sharply, buyers could forfeit their deposits and not pay for the rest of the vessel, leaving the shipyard stuck with the project. As global demand for commodities withered in the last two years, ship prices dropped more than 20 percent — and in some cases, more.
For the 58,000-ton bulk freighters that Chinese shipyards were churning out, prices have plunged from nearly $30 million in 2013 to just $16 million now. Buyers who bought at the high end chose to forfeit their deposits instead of paying for finished vessels worth less.
Chinese shipyards are now littered with half-finished shells, like immense steel earthworms cut in two. Many shipyards lack the money to complete vessels and sell them at a discount that might allow them to recover some costs.
Even strong buyers are balking at completing deals. Sainty Marine has four finished vessels that were rejected by Precious Shipping of Bangkok. Precious Shipping backed away, in a dispute over the quality that has triggered an arbitration case in London.
The Bank of China, one of the country’s biggest commercial banks, pushed Sainty Marine into court on Tuesday in the shipyard’s hometown Nanjing, in Jiangsu Province. The bank requested the appointment of a liquidator, as Sainty Marine is already overdue on $81 million in loans.
A Sainty Marine official who gave only her family name, Ma, said that the court had held hearings this week, but added that she was not aware of any decisions. The bank and the court had no comment.
It is rare for state-owned banks to pursue debts so aggressively.
Authorities periodically send signals about shutting down such zombie companies. “Zombie enterprises are not new, but as the economy feels downward pressure, their seriousness and danger becomes evident,” People’s Daily, recently said.
But banks usually keep rolling over debts and lending more, particularly for state-owned companies like Sainty Marine.
The shipbuilding industry, though, is in complete disarray, with dozens of Chinese companies lacking any orders. The government, which has halted export credits for the sector, seems determined to force some closings.
In other circumstances, a weaker currency might offer relief.
When the currency drops, it makes imported goods more expensive. That helps stave off deflationary pressures that hurt companies’ ability to raise prices. It also makes labor costs look lower in dollar terms, which in turn can help attract overseas investment.
Those dynamics are a big reason the Chinese government has been letting the renminbi fall.
But the currency is also challenging.
A weaker renminbi could further dampen Chinese demand for imported commodities, which are typically priced in dollars. As Chinese appetite wanes, freight stagnates and shipping companies have even less need for new vessels.
It’s a disastrous situation for Sainty Marine. “Even for what’s in the order books,” said Mr. Flynn, the shipping consultant, “people don’t want to take delivery of the vessels.”