Is struggling shipbuilder China Rongsheng too big to fail?

Sun Jul 7, 2013 5:05pm EDT
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By Koh Gui Qing and Yimou Lee

HONG KONG/BEIJING (Reuters) - An appeal for government financial support from China's biggest private shipbuilder presents authorities with some stark choices between protecting a big employer and its jobs or letting the firm go under to ease pressure on a sector suffering from overcapacity and sharply falling new orders.

Since Beijing appears intent on telling investors it is serious about changing the investment-led growth model of the world's second-biggest economy and controlling a credit splurge, it may seem like the writing is on the wall for China Rongsheng Heavy Industries Group (1101.HK: Quote).

Yet analysts say the government is more likely than not to judge that Rongsheng, which employs around 20,000 workers and has received state patronage, is too big and well connected to fail.

Supporting Rongsheng will not mean China's economic reform plans are derailed, they say. Instead, it will mean reforms will be gradual and the government will cherry-pick firms it wants to support, which will exclude the small, private shipbuilders that have been folding in waves.

"Rongsheng is a flagship in the industry," said Lawrence Li, an analyst with UOB Kay Hian in Shanghai. "The government will definitely provide assistance if companies like this are in trouble."

Analysts say Rongsheng is possibly the largest casualty of a sector that has grown over the past decade into the world's biggest shipbuilding industry by construction capacity. Amid a global shipping downturn, new orders for Chinese builders fell by half last year. In Rongsheng's case, it won orders worth $55.6 million last year, compared with a target of $1.8 billion.

Rongsheng appealed for government aid on Friday, saying it was cutting its workforce and delaying payments to suppliers to deal with tightened cash flow.

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. Its 2012 annual report shows its short-term borrowings were about eight times bigger than its cash and cash equivalents.   Continued...

A view of the Rongsheng Heavy Industries shipyard is seen in Nantong, Jiangsu province, in this file photo taken May 21, 2012. REUTERS/Aly Song/Files