According to the International Finance Association (IFF), China’s corporate debt now accounts for more than 160% of GDP, most of which is owned by state-owned enterprises. According to World Bank experts, China’s corporate debt, especially that of state-owned enterprises, may be the biggest risk facing the country. Some experts analyze that China’s high debt could become a major obstacle to the effective growth of the Chinese economy.
Hong Kong‘s English-language media, the South China Morning Post, reported on Feb. 9 that economists said that in an effort to cushion the blow to the economy from the Communist Party’s viral Epidemic, the Communist Party stopped its deleveraging campaign of recent years in 2020 and replaced it with aggressive monetary and fiscal policies, which led to a sharp increase in corporate debt.
Martin Raiser, head of China, Mongolia and South Korea at the World Bank (World Bank), said, “Corporate debt is probably the biggest risk [to China], one reason being that [state-owned enterprises] are not only highly leveraged, but also tend to be less profitable than private companies. “
Data from the Washington, D.C.-based International Finance Association (IFF) show that Chinese corporate debt accounts for more than 160 percent of gross domestic product (GDP), with most of the debt coming from state-owned enterprises.
In 2020, SOE debt as a percentage of assets rose for the first Time since 2017 due to the outbreak of the Communist Party’s viral epidemic, IFF said.
The rising SOE debt-to-GDP ratio is even more alarming, soaring from 130% in 2019 to a record high of more than 142% last year, said Emre Tiftik, head of sustainability research at the IFF.
The number of corporate bond defaults in China has increased significantly since 2015-2016, Tiftik said.
The Financial Times reports that Chinese corporate bonds are up to $4 trillion in size, with a record $30 billion default in 2020. With more than 7 trillion yuan ($1.1 trillion) of onshore bonds maturing, the default numbers are likely to be even higher this year. This year’s January alone recorded $2.7 billion in defaults, of which Tsinghua Ziguang incurred a $2 billion default, the largest default value among them.
Analysts say the likelihood of a debt crisis may not be high, but under the weight of high debt ratios, it will be difficult for China to shift from a growth model driven by state investment and infrastructure to one based on consumption, services and market-based equity financing.
Chinese state-owned enterprises dominate the raw materials sector, which has been hit hard by the Communist Party’s viral epidemic. Some of the debt of state-owned enterprises, particularly local SOEs, is generally related to infrastructure investments and may pose a contingent liability to the government budget.
Analysts say signs of risk could grow exponentially as China tightens bank supervision and gradually reduces liquidity support, as the balance sheets of private companies and households have been affected by the outbreak.
The Communist Party’s central bank said in its report on monetary policy implementation for the fourth quarter of 2020, released late Feb. 8, that it should be highly alert to the overdraft effect and potential risks of an excessively rapid rise in the resident leverage ratio and should not rely on consumer finance to expand consumption.
The report said the resident leverage ratio rose by more than 31 percentage points between late 2011 and the first half of 2020, and “the space for continued debt expansion has been very limited, and the associated risks are a cause for concern.”
Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis Bank, said China’s high debt ratio could become an obstacle to “effective growth,” dampening consumption of durable goods and the corporate business environment.
Herrero added that the large fiscal debt could also limit the government’s ability to take countercyclical measures in the face of unexpected economic shocks.
Herrero believes that high debt will be a bigger concern for China’s economy than it was before the epidemic.
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