China advises state firms to watch finances as country moves to limit risk

China’s state assets watchdog has identified four areas within enterprises run by the central government worthy of careful monitoring – trust companies, finance subsidiaries, private equity and commercial factoring – indicating a tendency towards risk control running deep throughout the country’s economy.

Including state-owned industrial giants in a call for mitigation of systemic shortfalls shows the uncertainty generated by solvency concerns over local government financing vehicles, property firms and smaller banks is not strictly limited to those precarious institutions.

“[The central financial work conference] underscored the importance that each unit within state-owned enterprises confronts prominent issues,” the State-owned Assets Supervision and Administration Commission of the State Council (Sasac) said at a recent meeting.

Once risks surface, decisive action must be taken promptly to eradicate them in their infancy

State-owned Assets Supervision and Administration Commission

“[The conference] firmly called for rectifying issues of formalism and bureaucracy, proactively preventing and resolving risks in the financial sectors of central enterprises,” the commission said in an online statement published Monday.

Sasac has already set up a leading group to manage the tasks deemed necessary for a thorough de-risking process.

“Overall risks in the corporate financial sector need to be comprehensively assessed, identified, warned, exposed and disposed of at an early stage,” the watchdog said.

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“Once risks surface, decisive action must be taken promptly to eradicate them in their infancy, establishing robust and enduring mechanisms to firmly secure the baseline.”

The agency oversees more than 90 state-owned industrial giants, including China Mobile, China National Petroleum Corporation, contractor China State Construction Engineering Corporation and the Commercial Aircraft Corporation of China. Firms supervised by Sasac had total assets of 81 trillion yuan (US$11.4 trillion) at the end of last year.

China’s major financial players – including major insurers, investment houses and the “Big Four” state-owned banks – count Central Huijin, a subsidiary of the sovereign wealth fund China Investment Corp, as a controlling or majority shareholder, while many national joint-stock banks or regional lenders are controlled by governments at different levels.

Central enterprises only control some small brokerage houses, banks or trusts. To facilitate cash flow, many have financial subsidiaries.

In addition to their property development subsidiaries, some enterprises also have heavy exposure to the property or construction sectors through financing or ownership shares.

The warning from Sasac came as President Xi Jinping named financial risks as an “eternal theme” for the Chinese government during the central financial work conference in October.

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Beijing has also reshuffled China’s financial regulatory regime – establishing the Central Financial Commission as an instrument of direct Communist Party control over the sector – to coordinate the country’s risk management.

De-risking is thereby likely to remain a buzzword at the coming central economic work conference.

China’s property crisis, marked by the failure of development conglomerates Evergrande Group and Country Garden to honour their debts on schedule, has continued this year despite rounds of policy stimulus.

Local government debts have reached 38 trillion yuan, but hidden debts – borrowed through local government financing vehicles (LGFVs) to skirt restrictions on government borrowing – are believed to be even bigger.

The International Monetary Fund estimated that total LGFV debt had swollen to a record 66 trillion yuan this year, more than double the 30.7 trillion yuan figure from 2017.

Central enterprises also wield significant control and regulatory oversight over major banks, who are grappling with bad loans and record-low net-interest margins while still functioning as a lifeline for developers on the verge of default or collapse.