Wu Ge is the chief economist of Changjiang Securities and the director of China Chief Economist Forum
Core Ideas:
1. What is waiting for is the way back. The peak of the pandemic passed so quickly that the economy had a reason to pick up. However, it is difficult to find micro-entities that have withdrawn from the market, and even if they do, many of them are struggling. The strength of macro policies is still faintly visible, but as the "cell" of the economy, what is the current deficit of micro enterprises? Will the future economic repair be smooth or bumpy?
2. In the three years of the pandemic, enterprises have continued to reduce their operating income, and they are reluctant to expand financing, even if interest rates fall. The continuous deterioration of cash flow has led to a significant increase in the asset-liability ratio of enterprises. However, unlike the previous economic upswing, this climb is not caused by its active increase in debt, but more as a passive result of a faster contraction of assets. In essence, a "balance sheet damage" has been formed.
3. Scars are not memoryless. From the perspective of country experience, once a company's balance sheet is significantly damaged, it is difficult to restore its confidence in the short term. There is often a period of repair, during which the company's debt behavior will be more cautious. It is not until the asset-liability ratio returns to the historical pivot, and with the continuous increase in the return on investment, that medium and long-term credit is expected to achieve real expansion.
4. Looking ahead to the new year, as the impact of the pandemic subsides, the process of damage to micro entities' balance sheets may come to an end. However, there is still a clear distance from substantial expansion, especially for real estate enterprises whose main tasks are to "ensure the delivery of buildings" and "repay old debts". In the first half of the year, social finance credit is expected to recover in stages, but the main driving force still comes from the policy side, rather than the endogenous changes of market players.
Body:
The peak of the pandemic passed so quickly that the economy had a reason to pick up. What I look forward to is the way back. However, it is difficult to find micro-entities that have withdrawn from the market, and even if they do, many of them are struggling. The strength of macro policies is still faintly visible, but as the "cell" of the economy, what is the current deficit of micro enterprises? Will the future economic repair be smooth or bumpy?
Figure 1. Defects in the enterprise
Source: WIND, the author estimated
Note: The gearing ratio is weighted for non-financial enterprises.
1. What is the defect of the enterprise?
In the three years of the pandemic, the number of enterprises that disappeared such as bankruptcy and deregistration rose to a record high. Operating income continues to decline and businesses are reluctant to expand, even as interest rates fall. The deterioration in cash flow has led to a significant increase in gearing. From the perspective of the internal structure of the industry, the "head" characteristics of the post-epidemic competition pattern have become increasingly obvious, and the concentration of enterprises in consumer service industries such as wholesale and retail and leasing business has increased more significantly.
Figure 2. Housing enterprises first pay off old debts and then expand
Source: WIND, the author estimated
Note: Take a compound growth rate in 2021. The property to be handed over is the proportion of pre-receivables of listed real estate enterprises to total assets.
It is worth noting that at present, the real estate enterprises with the main task of "guaranteeing the delivery of buildings" are still in the stage of repaying old debts. Although the policy supports the repair of the balance sheet of housing enterprises, for crisis housing enterprises, whether it is asset disposal or bankruptcy liquidation, the change will be a slow process. Real estate investment will remain a drag on the economy in the first half of the year.
Second, repair the smooth road, or rough?
Different from the previous economic upswing, the rise in the asset-liability ratio of enterprises during the epidemic was not caused by their active increase in liabilities, but more of a passive result of the rapid contraction of assets. It is essentially "balance sheet damage". Scars are not memoryless. Country experience shows that once a company's balance sheet is significantly damaged, it is difficult to restore confidence in the short term. There is often a period of repair, during which corporate indebtedness will be more cautious.
Figure 3. Damage to expansion: in the middle is the repair period
Source: WIND, Cabinet Office, Japan, author's estimate
From the perspective of the mainland's reality, the direction of policy is clear and clear, such as supporting the guarantee of handover buildings, and the main driving force for credit expansion in the short term comes from the policy side. For market-oriented enterprises, it may be necessary to wait until their asset-liability ratio returns to the historical center, and with the increase in return on investment, medium and long-term credit is expected to achieve real endogenous expansion.
Figure 4. When will the company expand independently?
Source: WIND, the author estimated
3. Basic conclusions
One is to look forward to the way back. The peak of the pandemic passed so quickly that the economy had a reason to pick up. However, the deteriorating cash flow in the early stage has led to a significant increase in the company's asset-liability ratio. Unlike the previous economic upswing, this climb is not caused by its active increase in debt, but more as a passive result of a faster contraction of assets. In essence, a "balance sheet damage" has been formed.
Second, scars are not memoryless. From the perspective of country experience, once a company's balance sheet is significantly damaged, it is difficult to restore its confidence in the short term. There is often a period of repair, during which the company's debt behavior will be more cautious. It is not until the asset-liability ratio returns to the historical pivot, and with the continuous increase in the return on investment, that medium and long-term credit is expected to achieve real expansion.
Third, looking forward to the new year, as the impact of the epidemic subsides, the process of damage to the balance sheet of micro entities may come to an end. However, there is still a clear distance from substantial expansion, especially for real estate enterprises whose main tasks are to "ensure the delivery of buildings" and "repay old debts". In the first half of the year, social finance credit is expected to recover in stages, but the main driving force still comes from the policy side, rather than the endogenous changes of market players.
【Author】
Wu Ge: Ph.D., Chief Economist of Changjiang Securities. He worked for a long time in the monetary policy department of the central bank and as an economist at the International Monetary Fund. Sun Yefang Economic Science Award winner, won the Pushan Policy Research Award, Liu Shibai Economics Award, and won the "Vision Cup" economic forecasting champion.
Yu Tao, Cao Haiwei, Gao Tong: Researcher of Changjiang Securities.
Li Wei, Qi Zhuoyuan, Yang Yiping: intern researchers.