Rising bankruptcies in China could signal Japanese-style 'lost decade'
Rising corporate bankruptcies amid an economic downturn, tighter financing and stock rout could signal Japanese-style 'lost decade' on the mainland
The economic downturn, tighter financing and slowing payments add up to bad news for China's companies, with credit insurer Euler Hermes forecasting the number of corporate insolvencies to rise 25 per cent this year.
That is an increase of 20 percentage points compared with the outlook at the start of the year. Add an estimated 20 per cent more next year, and the two-year rise in insolvencies is expected to reach 50 per cent, wiping out more than 7,000 companies.
"Lower export growth, decelerating investment, less favourable financing mix and misperceptions of policy orientation are the underlying causes," said Mahamoud Islam, the Asia economist at Euler Hermes.
The real number of corporate failures could be much higher. "Insolvency procedures are complicated and expensive, so a significant number of Chinese enterprises find alternative ways to avoid filing for bankruptcy," Islam said.
Slowing economic growth is the major culprit. Euler Hermes forecasts China's growth to decline to 6.8 per cent this year and 6.5 per cent next year. Some expect worse. Societe Generale estimates 6 per cent growth next year, while Fitch projects 6.3 per cent and 5.5 per cent for the next two years.