[ET Net News Agency, 17 July 2019] China's National Development and Reform Commission
(NDRC) along with 13 ministries issued reform plan to facilitate the closure of "zombie"
companies, which number, according to 21 Century Business Herald, amount to 2,041 with
more than RMB3tn total assets as of November 2018 on SASAC's preliminary clean-up list.
Citi Research said eliminating them will allow the surviving companies to enjoy less
competition, better access to low-cost credit & better margin, thus revitalizing credit
demand to support more sustainable economic growth & lower real economy borrowing cost.
The research house said the exit of zombie companies is set to hurt banks' near-term
profitability via (1) weaker immediate credit demand, thus lower loan yield and NIM, and
(2) higher NPL & provisions.
Citi expects the government to conduct the clean-up gradually, and at the same time
maintain a low-interest-rate environment to avoid any large-scale default & ease banks'
NIM pressure.
It also noted that the NDRC has been preparing for this for almost two years and there's
been a series of regulations to accelerate banks' NPL recognition, write-offs
& provisioning to ensure sufficient buffer and prevent a potential capital shortage.
Citi estimated the banking system has RMB8tn total buffer for additional NPLs based on
cumulative write-offs since 2010 & existing provision, which suggests sufficient buffer to
digest the zombie company NPLs without triggering a capital shortage.
But it also believes the key casualties will be city/rural commercial banks with high
funding cost, poor risk management and high risk appetite. Citi expects more regional
banks may start to exit the market. (KL)