Presenting China’s First Too Big To Fail “Lack Of Liquidity” Casualty
China’s biggest private shipbuilder, China Rongsheng Heavy Industries Group, last week filed for a profit warning as it expects a loss in the first half of 2013. That was the good news. The bad news is that Rongsheng appealed for government aid last Friday and said it was cutting staff as it was delaying payments to suppliers to deal with tightened cash flows. It also called on its shareholders for financial help and said it was in talks with banks and other financial institutions to renew existing credit lines. In other words a complete liquidity collapse.
Well, maybe not complete: the company also said no suppliers have towed away machinery, and it has seen no “incident of abscondment of salary” pay (whatever that means). Yet. However, the Chinese government now must decide quickly whether this will be the country’s first tight liquidity-induced casualty, or will the PBOC’s resolve crash and burn with the first Too Big To Fail company emerging in China’s new liquidity-tight regime. If it chooses the former, watch out below as many more companies, which also find themselves on the liquidity edge, follow in Rongsheng’s footsteps and fold.
The fundamentals are not pretty: Rongsheng had CNY2.1 billion in cash balance versus short-term borrowings of CNY19.3 billion at the end of last year. And, as DB summarizes, being a flagship operator in the industry that employs around 20,000 workers there are also increasing talks of whether the company is too-big-too-fail for the State. Of course it is, but the bigger issue is how the PBOC – intent on showing the world that it means business in fighting the world’s biggest housing bubble - will react to a government bailout, which in turn will demonstrate that telegraphed market liquidity is absolutely worthless as any company that hits a liquidity crunch will simply get a government lifeline….
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