China to hack away at zombies and state firms’ debt in battle against financial risk

Sasac chief also sees more debt-to-equity swaps, diversified fundraising and private investment on the horizon

PUBLISHED : Saturday, 10 March, 2018, 9:24pm
UPDATED : Monday, 12 March, 2018, 12:41pm

China aims to slash the debt ratio of state-owned firms this year as it tries to ward off hidden financial risks.

Xiao Yaqing, head of the State-owned Assets Supervision and Administration Commission (Sasac), said the asset manager aimed to realise the goal by more debt-to-equity swaps, diversified fundraising, ushering in private investment and disposing of “zombie enterprises” and non-core businesses.

“We will further cut the absolute amount of the liabilities and the debt ratio as well, trying to minimise the level of risk,” Xiao said.

Risk control is one of the leadership’s three top priorities for the next three years, with overall leverage tagged as a key indicator.

Sasac oversees 98 state industrial giants, including China National Petrochemical Corp, China Mobile and State Grid.

State-owned enterprises (SOEs) are thought to account for more than 70 per cent of the country’s corporate liabilities, giving it a big role in the battle against debt.

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The Bank for International Settlements estimated that overall corporate liabilities totalled 128 trillion yuan (US$20 trillion) at the end June, or 163.4 per cent of the country’s gross domestic product. The ratio is much higher than 100.7 per cent a decade earlier, the 73.3 per cent in the United States, 53.8 per cent in Germany and 102.1 per cent in Japan.

Xiao said efforts to cut risk were under way and making inroads – the debt-to-asset ratio of central government-owned firms fell by 0.4 percentage point last year.

“The debt level of central SOEs overall is controllable. Risk only exists in some corporations or subsidiaries,” he said.

Sasac put the combined liabilities of central SOEs at 36.1 trillion yuan by the end of last year, only 14.4 trillion yuan of which was subject to interest – 9.6 trillion yuan in bank loans and 3.8 trillion yuan in securities or short-term financing bills.

Central government SOEs raised 357.7 billion yuan to increase equity last year, including raising private investment through ongoing mixed-ownership reform and a debt-to-equity programme.

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Among the major fundraisers was China Unicom, the country’s second-biggest telecom operator, which raised 78 billion yuan by selling a 35.19 per cent stake to several internet giants, including Alibaba, Tencent, Baidu and JD.com.

Alibaba owns the South China Morning Post.

Xiao said shareholdings would continue to be diversified among SOEs this year.

He also urged SOEs to make more of the “rare opportunities” presented by the 1 trillion yuan debt-to-equity programme, with just 180 billion yuan in deals struck in 2017.

Sasac shut down 400 debt-ridden “zombie enterprises” in 2017, with more liquidation and restructuring to come this year this year.