China finds itself strapped for cash for the first time in years
On Friday international media reported that China’s central bank faced down the country’s cash-hungry banks by allowing interest rates to spike again to extraordinary levels, while it increases pressure on the banks to rein in speculative trading and wide-spread informal lending.
On Thursday, Bank of China, one of the country’s biggest lenders, denied reports it had defaulted on a loan. Fitch ratings said that China’s worst cash crunch in at least seven years is an indicator of shadow lending gone awry and that a banking crisis may appear earlier than expected if liquidity remains tight.
In fact, in the last few years concerns about assets at Chinese banks have intensified, partially after the government-designed lending program in 2009, flush with cash, prompted banks to extend loans to local governments that backed low-yielding or massive infrastructure projects.
While China’s recent banking crisis and liquidity problems play out, banking is not the only industry in China facing cash problems. China’s three state-owned oil and gas companies (CNPC, Sinopec and CNOOC) are facing similar troubles, and in the process accumulating a staggering amount of debt that would have been unthinkable just a few years ago. However unlike China’s current banking woes, which stem from irresponsible lending practices, China’s national oil companies (NOCs) are a victim of the country’s energy planners.
China’s National Development and Reform Commission (NDRC) sets the price that NOCs can sell fuel products at home and the result has been particularly devastating on profits. While fixed fuel prices undoubtedly please the masses, it may be time to rethink the policy. For example, PetroChina, the publically listed arm of state-owned CNPC, said its 2012 profit fell 13.3 per cent to 115.33 billion yuan from 132.96 billion yuan in 2011, in spite of a 9.6 per cent increase in revenue generated from increased oil and gas output.
PetroChina Vice-President Sun Longde said that government price controls dampened his company’s margins, especially natural gas. PetroChina’s natural gas and pipeline business lost 2.11 billion yuan in 2012, compared with a 15.5 billion yuan profit in 2011.
The company’s cash reserves are also taking a hit as a result. As PetroChina experiences lower domestic profit margins, cash flow is suffering, particularly when commodity prices flatten. In fact, the company’s cash flow from operating activities has dropped three years in a row. PetroChina is rated below average in cash flow from operations among related companies.
But the biggest cause of concern for China’s NOCs is debt accumulation for overseas mergers and acquisitions (M&As). The past eight years have seen Chinese state owned oil companies spend $200 billion on foreign acquisitions and joint ventures.
To make up for low domestic profits due to fixed fuel prices and to fund M&As, PetroChina has already announced plans to spend about $7 billion in the next six months on assets from Mozambique to Australia, according to data compiled by Bloomberg.
In 2007 PetroChina’s debt to capital ratio was around 10 per cent, but by this March it had grown to 47 per cent and could break 50 per cent by 2015, said Neil Beveridge, Hong Kong-based head analyst for oil and gas in the Asia-Pacific region at Sanford C. Bernstein & Co.
However there has been some relief. On March 26, the NDRC announced that it launched a more market-oriented domestic fuel product pricing system to better reflect costs and adapt to fluctuations in global oil prices. However, most analysts claim (though a step in the right direction) it falls short of achieving full marketization. Consequently, NOC profits will still suffer.
All of this has a certain irony to it given the fact that China sits on the largest cash reserves in the world. As of May, China boasted $3.4 trillion in cash reserves, and growing. Maybe it’s time for Beijing take some of that cash and help its state-owned oil majors cut debt before it limits their ability to forge international oil and gas deals worldwide. As far as the banking problems are concerned, only time will tell if contagion will set in affecting other sectors in the process.Tagged in: Bank of China, Fitch ratings, PetroChina, Sinopec, Sun Longde
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