According to the Chinese horoscope, the Ox is the sign of prosperity achieved through fortitude and hard work. People born under the influence of the Ox sign are considered dependable, unswervingly patient, tireless in their work and capable of enduring any amount of hardship without complaint.

Interestingly, President Barack Obama is an Ox. It could also be argued that at the helm of “USA, Inc.,” he is managing the largest corporate recovery program ever undertaken. We should all hope that during 2009, as companies around the world continue to struggle with economic fallout that has resulted from the global financial crisis, we have Ox leaders at the helm of companies facing operating difficulties.
In order to survive, distressed companies must work quickly and efficiently to revise their strategic plans, contemplating a variety of measures such as corporate restructure, divestitures, down-sizing, contractual re-negotiations and re-financing, to name but a few. It can be difficult enough to manage in mature, western economies where the concept of corporate workout and turnaround is increasingly common and a declaration of bankruptcy is no longer considered taboo to the degree it once was – but can a workout be achieved successfully in China?

Certainly, China now has laws and regulations in place that deal with and provide for issues such as bankruptcy, labour force reduction, M&A, etc. However, much of China’s law is relatively new, much of it revised or promulgated since 2007, and it has yet to be truly tested, particularly in such severe economic conditions.

The greatest challenge for companies operating in China may well concern the ability to work through financial distress, access new loans and reschedule or refinance outstanding loans. General credit tightening and shortages of bank funds are not limited to China and, as elsewhere around the globe, the Chinese government has begun implementing measures to support the funding needs of SME’s and major state-owned enterprises alike. Nevertheless, the domestic banker ultimately decides whether to approve loan terms or not and it is not surprising that extreme conservatism has crept into their mentality as banks face economic challenges never experienced previously in modern China.

With Chinese GDP growth rates of 8 or more per cent since 2000, it is little wonder that domestic bankers have been traditionally encouraged to provide loans to companies, expecting low risk exposure. Even now, Chinese banks are not suffering from a liquidity shortfall and the Government continues to stimulate lending through base lending rate adjustments (four interest rate cuts since September 2008, the largest rate cuts since 1997) and a reduction in the bank deposit reserve ratio – 16 per cent since December 2008 down from a high of 17.5 per cent.

Nonetheless, to prevent an escalation in non-performing loans, banks are tightening loan qualifications and withdrawing loans to companies considered high risk. And this trend is not limited to the commercial banks. China’s historical source of non-bank financing for SMEs and privately-held entities that have less onerous collateral requirements and credit risk assessment are also now feeling the pressure of rising levels of bad debt collection, especially when you consider that annual interest rates traditionally could range anywhere from eight per cent to as high as 100 per cent.

Part II follows next week.