Courtesy of Also Sprach Analyst.
A worrying new wave of business owners running away is emerging in China, as their overstretched and over-leveraged companies run into financial troubles.
Last year, I noted a wave of companies’ business owners running away as the economy slows. Many of these companies were forced to borrow from the informal lending system at high interest rates as credit in the formal banking system was tightened. The last wave of bosses running away subsided for a while, but the problems many companies face have not gone away. In fact, as the economy slows further on the back of weak domestic demand and slumping external demand, the problems have gotten arguably worse, not better.
So far, this is yet to become something more substantial, but it again confirms the difficult challenges the economy is currently facing, and should add further doubts on the consensus view that the economy has bottomed in the second quarter. A new wave of business owners running away is emerging once more according to Yicai. Business owners in Yangtze River delta, many of which are in the real estate, manufacturing and wholesale sectors, are escaping as their companies run into liquidity problems.
Interestingly, some businesses, are apparently willing to borrow at rates that they clearly are not able to service, but are able to offer collateral. And that, according to some involved in the underground lending, is a clear sign that the businesses in question will go bust very soon, and the borrowers probably have no intention to ever repay the debt. Experienced lenders in the underground lending business have already tightened risk management, and they are often unwilling to lend to these businesses.