Page 33 - Bloomberg Businessweek - November 19, 2018

Bloomberg Businessweek The Year Ahead 2019 Finance

Anxiety

▷ China’s policymakers are trying to deflate a lending bubble before it bursts,
just as investors have begun to worry about state intervention in companies

For the better part of four decades, the rise of Nonstate companies have lost at least $992 bil-
China’s entrepreneurial class has seemed unstop- lion in market value since mid-June, or about
pable. Unleashed by Deng Xiaoping’s reforms $32 million for every minute of trading, according
beginning in the late 1970s, the country’s private to data compiled by Bloomberg and WisdomTree
businesses have fueled the biggest economic Investments Inc. In October their shares tumbled
boom in the world. at the fastest pace in more than three years rela-
But what if China’s nonstate sector isn’t as tive to companies with government ownership.
strong as it looks? What if, instead, it’s been Local corporate borrowers, almost all of them pri-
pushed along by risky lending and frothy finan- vately owned, defaulted on a record $6.6 billion
cial markets? That fear, along with concerns of debt in the third quarter. At least 57 nonstate
about increased government meddling, gripped businesses have accepted government bailouts in
investors in 2018. As domestic financial conditions 2018. Such a wave of quasi nationalizations would
tightened, Chinese equities went into the deepest have been unthinkable just a few years ago.
sell-off among major stock markets. The pain has been felt at companies large
66
The turmoil has ratcheted and small—from internet behe-
up pressure on the ruling moth Tencent Holdings Ltd.
Communist Party, which to Jiaxing Linglingjiu
already faces the difficult Electric Lighting, a
task of combating an producer of ther-
economic slowdown mal bulbs whose
while at the same owner is weigh-
time preventing the ing whether
country’s record to ditch the
debt burden from business to
triggering a cri- go farm a
sis. A failure to plot of land
thread that pol- in China’s
icy needle could rural north-
affect markets east. “When
and economies w e m e e t
around the world with fellow
in 2019. China’s factory own-
leaders “are fight- ers, we don’t
ing fires on so many ask, ‘How’s busi-
fronts now,” says John- ness?’ like in pre-
Paul Smith, the London- vious years,” says Xu
based founder of Ecstrat Xihong, who started
Ltd. whose bearish stance on Jiaxing Linglingjiu in 2009
Chinese stocks in recent years has after moving into a factory
proved prescient. “Investors at the very least abandoned by a bankrupt state-run
should be preparing for slowing growth. At manufacturer of electric fans. “Now it’s ‘Do you
the worst, there’s a possibility of considerable think you will make it through the year?’ and
financial instability.” ‘When are you going to get evicted?’ ”