State-owned Enterprises

Lending adds increasingly less to Chinese GDP, pressuring Premier Li

Each yuan of debt is adding less to GDP with lumbering state-owned companies like China National Petroleum remaining the big borrowers

PUBLISHED : Friday, 31 May, 2013, 12:00am
UPDATED : Monday, 30 May, 2016, 5:01pm

The mainland economy is proving less responsive to credit, escalating pressure on Premier Li Keqiang to strengthen the role of private enterprise.

The government's broadest measure of credit rose 58 per cent to a record 6.16 trillion yuan (HK$7.8 trillion) in the January-March period, when gross domestic product gained 7.7 per cent, compared with 8.1 per cent a year earlier. Each US$1 in credit firepower added the equivalent of 17 US cents in GDP, down from 29 cents last year and 83 cents in 2007, when global money markets began to freeze.

The diminishing returns to lending heighten focus on the need for what the International Monetary Fund said on Tuesday are "decisive" policy changes in the world's second-largest economy.

Without a refocus away from state-approved projects, Li and President Xi Jinping risk overseeing both a further slowdown in growth and an increase in non-performing loans.

"Less efficient and more highly leveraged borrowers have been kept afloat, tying up credit that could be used to generate more growth," said David Loevinger, a former senior coordinator for China affairs at the US Treasury Department.

"To boost growth, China needs to channel more financing to its private enterprises, which are both more profitable and less leveraged than their state-owned counterparts."

State enterprises have seen their return on equity fall by half in six years, according to CLSA Asia-Pacific Markets in Hong Kong. The biggest concern from China's credit surge is the money going to companies and state-run enterprises whose performance is deteriorating, Francis Cheung, head of China-Hong Kong strategy, wrote in a report.

Signals from China's bond market, which has expanded 39 per cent so far this year compared with the same period in 2012, indicate businesses are struggling to improve profitability even with greater access to credit.

Borrowing in the debt market by the biggest Chinese companies is more than five times a measure of their operating earnings, twice the leverage ratio in 2007.

State-owned enterprises in energy and power production are among the biggest borrowers, including China National Petroleum, the nation's largest oil producer, and China State Grid, the country's largest power distributor.

Among 102 non-financial companies in the MSCI China Index, total debt over earnings before interest, taxes, depreciation and amortization rose to 5.74 times based on the latest filings through May 28, from 2.49 times in 2007.

One example of what Loevinger, now an emerging-markets analyst in Los Angeles at TCW Group, called "inefficient and leveraged borrowers", may be LDK Solar a maker of solar panels. The company, which cut solar-cell production capacity by 89 per cent last year, said in April it's in the process of getting a new loan facility of about 2 billion yuan.

LDK has debt of US$3.1 billion and has posted seven straight quarterly losses.