Analysts foresee stable growth, robust pipeline for funds in second half of year

Stability is a good word. As the economy's performance data for July point to a return to stability, so does the stock market.

Between now and the next major policy statement, the earliest being in mid-September, all China stocks listed at home and overseas are likely to enjoy a period of stability rare for the year. In the A-share market, investors are less likely to see repeated falls of the Shanghai Composite Index to below 2,000 points, as they did in the previous few months of the year.

Last month the industrial production of large enterprises, closely linked to the growth of GDP, rose 9.7 percent year-on-year, compared with 8.9 percent in June, and the biggest increase since February.

China seems to possess a lot of policy ammunition to steer its economy clear of a collapse. Analysts are forecasting stable growth, if not slow, cautious acceleration, in the third and fourth quarter.

In the meantime, as all local governments undergo a major stocktake of their outstanding debt by the National Audit Office, and banks understandably rein in their loan programs, more companies will try to raise funds from the capital market.

However, there are different types of growth. There are regions that rely mainly on growth from the service sector and new industries and regions held back by old industries plagued by low product prices, pollution and overcapacity. And just as there are different types of growth, there are different types of fund raisers, in both the secondary market and the direct-investment market.

Investors will probably walk away from the local governments and companies that just claim to own mega-projects - unless they can show a balance sheet (a real one, of course) of less debt, and most importantly less debt tied to projects that may take many years to generate a cash flow.

Investors and financers do not usually ask the fund-raising local governments and their affiliated companies to report their debt situation, simply believing that China will never let a government entity go bankrupt, as would probably happen in other countries.

But without going through the short pain of bankruptcy, some local governments and their financial vehicles may have to go through a long pain (bankruptcy is a long process after all) of being forced to rebalance their projects and resources. If this happens, investors and financers can earn nothing and do nothing except wait in despair.

To be sure, builders of many second and third-tier cities' CBDs and imaginary high-end shopping arcades, large shopping centers and high-rise office towers would have less chance to reap a quick return as they once expected.

If a local government owns many such projects, it may have to sell them to other owners and managers.

Local governments and their financial vehicles are unlikely to be attractive fund-raisers in the capital market for the remainder of the year. Large banks, which used to make easy money by lending to them, would also have to go through their own consolidation.

The really welcome fund-raisers, as in any market, are those with light debt and quick cash flow. They are the builders of houses for the common people, exporters that are still increasing exports, the manufacturers that are still selling their products en masse, the suppliers to major central government projects (such as makers of high-speed trains), and the services that understand how to please urban young people.

Banks will only start to be interested if they are asked to help local governments restructure their debt.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn.

(China Daily European Weekly 08/16/2013 page13)