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Business
Taking the Economic Pulse
Collective wisdom on how to meet challenges and seize chances at the Boao forum
By Li Nan | NO. 14 APRIL 6, 2017
 
Vice Premier Zhang Gaoli (center) meets with members of the BFA Board of Directors during the 2017 BFA Annual Conference in Boao, Hainan Province, on March 24 (XINHUA)

On March 24, Yang Kai, Chairman of China Huishan Dairy Holdings, a company that covers the entire dairy value chain from plantation to dairy farming and manufacturing and is based in northeast China's Liaoning Province, issued an announcement.

"In light of the significant decrease in the share price of China Huishan Dairy Holdings in the morning, the company requested the Stock Exchange of Hong Kong to halt trading in its shares with effect from 1:00 p.m. today," it said. "The company will issue an announcement as soon as practicable after it has completed its inquiries."

The "significant decrease" refers to a plunge of more than 90 percent in the company's stock price, which saw Huishan Dairy's market value diminish by nearly $4 billion. The share price plummeted from 2.81 Hong Kong dollars ($0.36) to 0.25 Hong Kong dollars ($0.032), the sharpest drop in the history of Hong Kong's stock market. It was also the second time that the company had suspended trading in three months.

The debacle, triggered by Huishan's hefty amount of debt, left the Chinese public buzzing. The company's latest financial report shows its overall debt amounted to 21.1 billion yuan ($3.06 billion) by the end of September 2016, accounting for 62 percent of its total assets.

Huishan Dairy's high asset-to-debt ratio is not unique in China. Many analysts believe that the overall debt ratio for Chinese businesses is too high and needs deleveraging.

On the same day that Huishan struggled with its loss, the 2017 annual conference of the Boao Forum for Asia (BFA) in south China's Hainan Province was holding a session on deleveraging.

The theme of this year's conference, held from March 23 to 26, was Globalization and Free Trade: The Asian Perspectives. The aim was to promote economic exchange, coordination and cooperation within Asia and between Asia and other parts of the world. Over 1,800 economists, entrepreneurs and government officials shared their views on major economic issues.

This year's conference highlighted the challenges in China's supply-side structural reform and the opportunities brought by the Silk Road Economic Belt and 21st-Century Maritime Silk Road (Belt and Road Initiative).

Representatives share their views on the Belt and Road Initiative at the 2017 BFA Annual Conference in Boao, Hainan Province, on March 25 (COURTESY OF THE BFA)

Curing pain points

The supply-side structural reform—initiated in late 2015 to cut excess capacity, destock, deleverage, lower corporate costs and improve weak economic links—was one of buzzwords at this year's BFA conference.

"Although China's overall debt volume is not high, there are problems in its structure," Li Yang, President of National Institution for Finance and Development, said, adding that debt in enterprises, especially state-owned enterprises (SOEs), is a source of conflict in the country's debt structure.

According to data from the Ministry of Finance, SOEs' total debt climbed to 89.56 trillion yuan ($13 trillion) at the end of February, up 11.6 percent year on year. This means debt takes up 65.88 percent of SOEs' total assets.

"Debt in the resource and raw material sectors is worrying," said Zhu Min, a Chinese economist and former Deputy Managing Director of the International Monetary Fund, adding that overcapacity in these sectors leads to thin profits and unsustainable debts. "We have to make proactive policies to address the structural debt problem in China," Zhu said.

Zhu suggested that the market play a more decisive role in weeding out underperforming enterprises. Also, the structure in sectors with excess capacity should be reshuffled. Lastly, the central bank should keep a close eye on the cash flow, preventing too much cash from flowing into the wrong fields.

Lowering corporate costs and solving financing difficulties are some of the challenges facing supply-side structural reform. There has been a public outcry over the perceived tax burden since Cao Dewang, President of China's auto-glass titan Fuyao Group, said last year that China's manufacturing industry is overtaxed and costs too much. Although opinions on the tax system remain divided, it's a fact that overloaded non-tax charges have made corporate costs shoot up.

The government is trying to abolish hundreds of administrative fees and put in place tax reduction policies to bolster small and medium-sized enterprises (SMEs).

According to the government work report released in March, the trial replacement of business tax with value-added tax slashed businesses' tax burden for 2016 by over 570 billion yuan ($82.71 billion). Enterprises' social security contributions were lowered and the price of electricity was cut.

Moreover, financial technology (FinTech) is being used to lower corporate operating costs and bolster SMEs. According to Chen Shengqiang, CEO of JD Finance, the FinTech arm of e-commerce giant JD.com, FinTech means using big data, artificial intelligence and blockchain technology to design financial products for financial institutions.

JD Finance has provided over 100,000 SMEs with loans accumulatively reaching 250 billion yuan ($36.4 billion), Chen said at a session of this year's BFA conference.

According to Chen, Baitiao.jd.com, JD's online loan platform, is now using 30,000 variables to calculate the credit ratings of more than 200 million people. "It makes automated loans without any human review, saving human resources," Chen said.

The new technologies also provide viable commercial models for inclusive finance. In the past, many underdeveloped regions did not have access to financial services. "In the era of mobile Internet, we can solve this problem by using digital technologies and achieve the goal of inclusive development," Li Dongrong, President of the National Internet Finance Association of China, said.

Chen said 16 percent of JD Finance's loans went to rural areas, providing 42,000 impoverished people financial services.

Gregory D. Gibb, Co-chairman and CEO of Shanghai Lujiazui International Financial Asset Exchange, said FinTech will solve two major problems in China's real economy.

First, the difficulty private, small and micro enterprises face when looking for financing. The financing demand of SMEs and individuals currently accounts for 10- 15 percent of the total demand but in three to five years, this will increase to 20-30 percent.

Second, personal investment risks are expected to be lowered. Big data computing and personal investment strategies will become a core part of the market. FinTech can solve the problem of excessive concentration of individual investment and promote its diversification.

Solution for globalization

Experts at the BFA forum see the Belt and Road Initiative not only as a Chinese solution to counter anti-globalization, but also as a opportunity for China to transfer its excess capacity.

"The Belt and Road Initiative is a Chinese proposal on pushing forward globalization. The initiative seeks to build a community with shared future through consultation, co-construction and sharing," BFA Secretary General Zhou Wenzhong said.

"The Belt and Road Initiative presents a opportunity for China's private enterprises to invest in overseas markets," said Bo Lianming, President of TCL, a leading home appliance producer.

In 2016, the value of contracts that China signed with 61 countries and regions along the Belt and Road routes reached $126.03 billion, up 36 percent year on year and making up 51.6 percent of the value of China's newly signed overseas projects, according to data from the Ministry of Commerce. In the first two months of 2017, China's non-financial outbound direct investment (ODI) in countries along the Belt and Road routes took up 13.3 percent of the total ODI in the first two months of the year, compared with 8.5 percent in 2016.

"Chinese private businesses are bound to benefit from systematically exploring the vast market created by the Belt and Road Initiative and by taking advantage of the Belt and Road countries' comparative advantage in technology and scale," economist Zhu Yunlai said.

Copyedited by Sudeshna Sarkar

Comments to linan@bjreview.com

Related:
China's Capital Market Becomes More Rational: CEOs
Vitality Through Diversity
FinTech is to Buoy China's Real Economy: Experts
Tapping Into Potential
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