Ministry of Finance Issues Notice to State-Owned Financial Companies to 'Tighten Their Belts'
Guidelines for Soundness Including Write-Offs of Zombie Companies Unable to Pay Interest Provided
[Asia Economy Senior Reporter Cho Young-shin] Chinese authorities have put a brake on excessive compensation (wages) of state-owned financial companies. They also issued a notice to strengthen the financial management of state-owned financial companies.
This notice is interpreted as an instruction to prepare for shocks caused by economic downturn and as a call to "tighten the belt."
According to Chinese media Economic Daily on the 9th, the Ministry of Finance recently notified to standardize financial management so that the finances of financial companies can be operated in a stable manner through the "Notice on Strengthening Financial Management of State-owned Financial Enterprises."
The Ministry of Finance conveyed this notice to related institutions and companies, stating that it must thoroughly implement the work requirements of the Party Central Committee and the State Council, correct financial order, and lead the high-quality development of the financial industry.
The Ministry of Finance emphasized first to standardize the management of income and expenditure of financial companies to solidify the financial foundation. It also instructed to strengthen budget management and reasonably control costs. This means stopping unnecessary expenditures.
In fact, it specified minimizing expenses used for meetings and business trips (including domestic and overseas), training, events, and entertainment expenses (strictly prohibiting provision of premium liquor). Detailed guidelines were also provided to actively utilize IT technologies such as video conferencing for cost reduction.
Guidelines were also presented regarding the salaries of employees of state-owned financial companies. It was clearly stated that the average salary increase rate of financial companies should be lower than the average salary increase rate in 2018. Along with this, it instructed to scientifically design the compensation system and reasonably control the differences in job distribution among operational staff, middle, and senior management positions.
Detailed guidelines on financial asset management were also issued. The notice specified that each state-owned financial company should strengthen soundness management by classifying risks of held assets in detail.
It also clarified the standards for write-offs of non-performing loans held. Companies (bonds) with a debt-to-asset ratio exceeding 85% and recording net losses for three consecutive years, companies with negative operating net cash flow, companies that have stopped production for more than six months, companies with low credit ratings, and so-called zombie companies that cannot even pay loan interest must be preemptively cleaned up according to regulations.
This notice applies to state-owned financial enterprises, sovereign wealth funds, state-owned financial holding companies, and state-owned investment financial companies, and it was made public so that other financial companies can also refer to it.
Due to the "Zero (0) COVID" policy following the resurgence of COVID-19, China's economic growth rate in the second quarter increased by only 0.4% compared to the same period last year. The second-quarter growth rate is the lowest since the first quarter of 2020 (-6.8%), when the Wuhan outbreak had the greatest impact. It is the second-lowest growth rate ever recorded. Although there has been a rebound in the third quarter, the dominant view is that achieving this year's economic growth target of "around 5.5%" is virtually impossible.
The core of this notice is that the soundness of state-owned financial companies must be maintained in preparation for a significant increase in non-performing companies, and it is interpreted as the Ministry of Finance effectively acknowledging that the Chinese economy is at risk.
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