Written By Basilio Chen

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“The last shall be the first”: in words,

For their part, [Chinese] companies are being encouraged to engage in M&A to consolidate, cut costs and streamline. Find a partner.

An old saying: “Don’t wait to be thirsty to dig a well”  Is precisely what people  who say they know a lot of Chinese Culture have forgotten to do.

Back in 2012, when I wrote my book “

This will be one of my few perhaps the only article where I pound my chest predicting what many did not.  Many knew China would have an economic correction, however I was the only one in written print that said M&A was the key solution for China’s eventual problem (which is now today).  Basilio Chen December 23,  2015

The article content reflects the situation today.


Everything just changed for Chinese companies

By Linette Lopez

We may be about to see what it’s like when big Chinese companies go bankrupt.

After a weekend at China’s Central Economic Work Conference, Chinese officials have laid out details for what promises to be an excruciating reform period for its corporate sector.

"China will create conditions for execution of bankruptcy procedures based on market rules, and speed up trials of bankruptcy liquidation cases," said a report from Chinese state media agency Xinhua.

"In China, some industrial sectors have been struggling with weak demand and falling prices while suffering from outdated production ability, pushing their profitability down to dangerously low levels," the report said.

The report added that Monday’s measures will allow the market to play "a bigger role" in allocating resources and push under-performing businesses to exit the market.

Here’s what the International Monetary Fund said about the situation earlier this fall:

The high level of credit could weigh on China’s growth and financial stability. The efficiency of the investment financed by credit has been falling, with a commensurate drop in corporate sector profitability. This situation makes servicing debt obligations more difficult.

So far the government has responded to increasingly unprofitable companies by allowing them to take on more debt, but as Societe Generale economist Wei Yao has argued, continuing down that road sets the country up for disaster.

"Having the central government bail out every zombie company and pay for the whole restructuring would not only be very costly to Chinese consumers (the taxpayers) but would also exacerbate moral hazard, thus impeding long-term positive developments of domestic capital markets," she wrote.

"However, there is no formula on how much credit risk China’s financial market can handle by itself without plunging into a full-blown crisis," she added.

China is walking a tightrope, in other words.

According to Xinhua, the government will cut taxes for businesses, figure out support programs for the unemployed and come up with ways to handle non-performing assets.

Monetary conditions will remain loose too. The PBOC has already been cutting interest rates to stimulate the economy since the end of 2014, and that will continue through this process. 

(cutting interest and asking companies to acquire more debt is like adding fuel to the fire.  The same companies are in trouble from taking more debt that they can burden instead of cutting cost, many became fatter at spending”.)  Basilio Chen

For their part, companies are being encouraged to engage in M&A to consolidate, cut costs and streamline. Better find a partner.

I just came from a week long roadshow and speeches that showed what arrogance combined with ignorance does.  Wenzhou and Fujian once called the Jews of China, has a group full of confused scared yet hiding under the disguise of a ostrich with their head in the hole.  Ignoring good government advice and drink their sorrows away with more Baijiu.  This is the best time to consolidate while the bosses are having a party and the balance sheets turns read, when they sober up they will ensure their companies are sold as their last resort for less than fair market.  Thus, the old saying for best investment timing is “buy low, sell high”.