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The Sky Is Falling on Chinese Corporations

The four largest banks in China, the banks that have to officially show big profits and profit growth no matter what because they’re an integral part not only of the government but also of China’s miraculous debt-driven expansion, are showing officially tolerated signs of increasing stress. For perspective, in 2009, following the Lehman moment, as other banks were collapsing and were bailed out, the profits of these four banks grew even then, if only by a combined 2.9%.

These four mastodons – Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China – admitted to 384.7 billion yuan ($62.6 billion) of bad loans on their book at the end of June, a 13.2% jump from just six months earlier. The jump in bad loans ranged from 11% at Agricultural Bank of China to 17% at Bank of China.

If we suspend our disbelief in Chinese numbers, bank numbers in general, and Chinese bank numbers in particular, for a very brief moment and accept them temporarily as if these bad-loan numbers were actually something close to reality, rather than something ludicrously beautified, they would amount to about 1% of total lending by these banks. And it’s gnawing at their profits: their relentless state-mandated rise slowed to 9.6% over prior year.

Culprit? Struggling companies in the manufacturing, wholesale, and retail sectors, particularly those involved in the now curdling property market. Marine shipping companies have been slammed. Overcapacity in manufacturing, which has been hounding China for years, has caused prices to plunge. And the real estate sector has begun to quake at its foundation, after years of overbuilding, which goosed GDP in the government-mandated manner by creating a breath-taking amount of oversupply including entire ghost cities. To round out the scenery, companies selling luxury goods or services have gotten hit by a crackdown on corruption – politically motivated or not; conspicuous consumption, the erstwhile hallmark of officials now deemed corrupt, has become unpopular.

It all has turned into a reeking mix of teetering companies and banks that lent these companies regardless of realities on the ground because it was the government’s way to push the economy forward, no matter what. And these companies are now getting crushed.

For the first half, of all the companies listed in Shanghai and Shenzhen, 366 (or 14%) reported losses, according to the Nikkei Asian Review. An all-time record.

Of the bleeding companies, 67% were manufacturers. Steel and nonferrous metals sectors have been getting clobbered by the turmoil in the property sector where an ongoing home-price crash has pricked one of the largest construction bubbles in history. And 26 companies in the real estate sector also reported red ink.

The biggest loser: state-owned Aluminum Corp. of China.

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