For some Chinese companies, no return to pre-coronavirus methods

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This photo taken on March 23, 2020 shows employees eating during the lunch break at a Dongfeng Honda car factory in Wuhan in central Hubei province in China.

STR | AFP | China

As the second quarter begins in China, it’s a changed landscape in the coronavirus economy with businesses that remain closed – some for good.

The official rate of return to work has increased steadily since the start of February, when more than half of the country extended the Lunar New Year holidays by at least a week to limit the spread of the disease officially known as COVID. -19.

As of March 29, small and medium-sized businesses across the country have returned to work at 76.8%, down from around 60% about two weeks earlier, according to monitoring by the Ministry of Industry and Technology. information for approximately 2.2 million small businesses. cloud computing platforms.

But we don’t know how fast or if this figure can reach 100%.

“A further increase in the upturn in the work rate for medium, small and micro enterprises could reach a bottleneck, as some small, medium and micro enterprises may have collapsed and the data may not increase a lot, “Bruce Pang, head of macro and strategic research at China Renaissance, said on Monday, according to a CNBC translation of his comments into Chinese.

To date, more than 429,000 companies have dissolved or suspended their operations for the year to date, according to an analysis by Qichacha, which maintains a database of information on Chinese companies.

Wholesale and retail trade held the largest share of the activities that dissolved the operations, at around 38%, according to the data. Leasing and business services come in second, at around 15%, followed by manufacturing, at around 8%. However, compared to the more than 126 million businesses still operating, closings were well below 1%, according to the data.

The coronavirus that emerged at the end of December in the city of Wuhan has killed more than 3,300 people in China. Even if the spread of the virus has stagnated at the national level, the authorities are concerned about a resurgence, especially since the disease has become a global pandemic which has killed more than 39,000 people in the world outside of China .

As Chinese authorities try to limit the spread of the virus, particularly travelers returning from abroad, changing policies can make it difficult for businesses to resume business. For example, the hard-hit cinemas were about to reopen gradually over the past week, until the China Film Administration said on Friday that all cinemas must close and remain closed, state media reported.

Meanwhile, the largest Chinese companies, such as large industrial companies, posted an official recovery rate of 98.6% as of March 28, with a slightly lower rate of workers returning to work at 89.9%. These large industrial enterprises derive an annual income of at least 20 million yuan from their main business activities.

Some regions have also reported a 100% upturn in work rates for specific industries. For example, Guangdong Province said that at the end of March, 77 publicly traded companies had a 100% return to work rate.

But analysts point out that these high numbers do not necessarily reflect the amount of companies that produce and contribute to growth. China Renaissance estimates that for large industrial companies, the economic use rate is at least 75%, according to a report released on Tuesday.

Looking ahead, Pang noted that the global spread of the virus could cause some disruption of new orders for foreign trade companies in April, and the ability of domestic demand to match falling foreign demand is uncertain because the virus, employment and the condition of small and medium-sized businesses are contributing to the appetite for investment and consumption.

Small private Chinese companies contribute the majority of the country’s growth and jobs. Yet they have tended to struggle in a state-dominated environment, especially since the big banks are public and prefer to lend to public enterprises.

Fallout on financial pressures

Small businesses have been at the center of Beijing’s response to the impact of the coronavirus on the economy, most recently including a meeting on Tuesday of the State Council, the country’s highest administrative body. The recently announced measures specifically targeted small and medium-sized banks, offering them an additional trillion yuan (about $ 140.8 billion) to lend at a special rate and reducing the amount that small banks need, also known as reserve ratio name required.

“(Small and medium-sized banks) could be severely affected by the COVID-19 pandemic because many, if not most, of their debtors are already very likely to experience financial difficulties,” said Ting Lu, chief economist of China at Nomura. in a note Wednesday morning. “In this regard, the announcement of the State Council’s policy aims to support both SMEs and small and medium-sized enterprises (SMEs). “

The additional financial pressure comes from the fact that Chinese companies, private and public, have come to a slowdown in growth in the second largest economy in the world.

A Fitch Ratings analysis released on Monday pointed out that “in the past two years there has been a significant increase in the total number of defaults in China”, which has also hit state-owned enterprises, formerly considered to be profiting still government support.

The defaults on bonds issued in China by private companies are still much larger than those of public companies, although the latter accounted for 89% of onshore issues during the two-year period, according to the Fitch report.

“If the economic situation continues to deteriorate, we will see overcapacity players (will) face a more difficult environment and their ability to receive support from their parents (for a recovery) will be weaker”, Jenny Huang , director of corporate research in China, Fitch Ratings, said Tuesday in a telephone interview.

A global challenge

The impending financial hardship caused by the virus is global.

Moody’s analysts said in a report on Friday that they expect business failures to increase worldwide as the coronavirus hits global economies. If the slowdown in growth is brutal but short, the overall default rate should reach 6.8%; this figure should climb to 16.1% if conditions resemble those of the global financial crisis.

In just one sector, controls in the retail sector in Southeast Asia saw traffic fall by more than half in February and March compared with a year ago, both due to the Local spread of the virus and the decline in Chinese tourists, said Suresh Dalai, senior director. to the consultancy firm Alvarez & Marsal, which specializes in retail operations in Asia.

He noted that a well-capitalized retailer typically has three to six months of cash, as well as access to a revolving line of credit. But the scale of not-so-good retailers is more prevalent, the Dalai said, noting that companies are trying to talk to their suppliers, owners and other partners to try to stay afloat for now.

Even though G-20 leaders pledge $ 5 trillion in support and governments announce a series of stimulus packages such as tax cuts, economists have cut their growth forecasts this year in China and the rest of the world. world. Lu de Nomura expects the Chinese economy to contract another 0.5% in the second quarter, after an expected contraction of 9% in the first quarter.

Ultimately, the concern for governments like China’s is to guarantee the employment of people.

As Liu Shangxi, president of the Chinese Academy of Tax Sciences, a research institution in the Ministry of Finance, said in a CNBC translation of an online article in Chinese published on Tuesday:

“Saving businesses means making sure that industrial chains and national supply chains have no problems. Corporate capital ties need to be stabilized to avoid a large number of bankruptcies that would reduce existing jobs. “

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