Sunday, December 6, 2009

Private Chinese Firms Don't Get Bank Loans? Think Again.

Just when you think you have it all figured out.

The Bank of China, one of China's Big Four state-owned banks, has been busy funding auto companies this week.

The Bank announced this week that it has approved a 20 billion yuan ($2.9 billion) line of credit for Beijing Auto Industry Holding Corp (BAIC). Some are speculating that this money may be used by BAIC in its continued pursuit of an overseas purchase, most likely Saab, or at least some of its assets.

BAIC is owned by the local Beijing government, so the fact that Bank of China is providing funds should not come as a big surprise. Bank of China and BAIC are both state-owned.

But BAIC is not the only Chinese auto company to get funding from Bank of China this week.

The Bank also announced that it will be providing a 15 billion yuan ($2.2 billion) line of credit to BYD, a private auto firm based in Shenzhen. (Announcement here in Chinese.) BYD, which is listed on the Hong Kong stock market, was made famous earlier this year because of an strategic investment by one of Warren Buffet's companies.

Though BYD did not confirm this, apparently the lending facility will be used to support BYD's R&D efforts in new energy vehicles and solar power generation.

This bit of news runs contrary to the story we always hear about private Chinese companies having difficulty getting financing. The biggest and strongest banks in China are, by design, state-owned, and therefore, the logic goes, they are only interested in supporting state-owned enterprises.

While China's government wants its state-owned banks to be profitable, and is happy to boast about it when they are, these banks, like any SOEs are tools of the state. They will be used to serve the ultimate interests of the state. In this particular case, I am guessing that it is in the interests of the central government to demonstrate their commitment to research and development in the area of new energy vehicles just prior to the Copenhagen summit.

While BYD has yet to put anything close to a significant number of its hybrid or pure electric vehicles on the road, they are, among all Chinese companies, probably the furthest along in development.


  1. Hello Greg,

    I think your last two paragraphs probably make the point best on why BYD has secured state financing. After all, it is the golden boy in next generation car technology (even if it can't seem to sell many units), and has even been anointed by the Sage of Omaha himself...

    Is BYD fully private? I had thought there might be at least a small portion of local government ownership in Shenzhen.

    In your research do you distinguish between 'state-owned' central and 'state-owned' local?


  2. Thanks for the comments, Will.

    According to BYD's annual report, BYD's Chairman, Wang Chuanfu and his co-founders (and non-exec Chairmen) control more than 50% of the shares. The next largest bloc is Warren Buffet's 10%. There are some smaller institutional blocs (all <3%) some of whose names I don't recognize. One or more of those could be a state-owned investment firm, but even if it is, the size of their holding would be relatively insignificant.

    I do distinguish between central and local SOEs (for which I am suggesting the acronyms CSOE and LSOE, respectively). Part of my research is aimed at determining whether ownership type (CSOE, LSOE, private, joint-venture) has any significant influence on either firm performance or quality of relationships with respective local governments.

  3. "This bit of news runs contrary to the story we always hear about private Chinese companies having difficulty getting financing." Greg, I think you're being a bit hasty. The story has never been that private Chinese companies NEVER get financing. The story has been that the aggregate numbers show that they are heavily disfavored. And only aggregate numbers can contradict that story. A single instance doesn't really tell us anything.

  4. Thanks for your comments, Don. Your point is well taken.

    Please note that I also did not say private companies "never" get financing. And by saying they have "difficulty getting financing", I don't think I am setting up a strawman here.

    In fact, my research has revealed multiple complaints from many private Chinese businesses about the difficulty of getting financing -- including, oddly enough, BYD, which the news above indicates is no longer the case.

    Since I wrote this particular post, it also appears that Geely, another private company with complaints about financing, is getting funding from state-owned banks for its impending purchase of Volvo.

    So, yes, while you have a good point that the aggregate figures may not yet indicate a change in policy, these examples are a clear indication that the central government does not really distinguish between public and private when it comes to accomplishing elements of industrial policy.


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