China debt: highly-leveraged state firms could threaten ‘efficient growth’, private investment post-pandemic

Name: China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years
Uploaded: 2021-02-08T11:59:16.000Z
Duration: 1 min 33 s
Description: China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

Debt among state firms in China grew from 130 per cent of GDP in 2019 to a record high of more than 142 per cent last year, the Institute of International Finance says

Although a crisis is unlikely, China’s high debt ratio makes it challenging to shift away from an economic growth model driven by state investment and infrastructure

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While China was the only major economy to post positive growth last year, it was partly because of a massive increase in corporate debt following aggressive monetary and fiscal policies aimed at fighting the coronavirus pandemic, according to economists. Photo: Xinhua

Karen Yeung

Published: 7:59pm, 8 Feb 2021Updated: 5:54pm, 18 Feb 2021

Surging debt among Chinese state-owned enterprises (SOEs) with close ties to local governments could become a major hurdle for private sector investment and broader economic growth, analysts say.

While China was the only major economy to post positive growth last year, it was partly because of a massive increase in corporate debt following aggressive monetary and fiscal policies aimed at fighting the coronavirus pandemic, according to economists.

China’s deleveraging campaign of recent years, which put particular focus on cleaning up inefficient SOEs and alleviating distortions in credit allocation, was halted last year.

Company debt now stands at more than 160 per cent of gross domestic product (GDP), according to the Institute of International Finance (IIF), with most of it owned by state-owned firms.

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China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

“Corporate debt is probably [China’s] biggest risk,” said Martin Raiser, World Bank country director for China, Mongolia and South Korea. “One reason is because [SOEs] are not only highly leveraged, but tend to be less profitable than private firms.”

China’s key challenge comes from the imbalance between its high domestic savings rate and demand for productive private sector investments, he said. China had previously exported its surplus savings through overseas mergers and acquisitions, but there were questions over the quality of investments and it also created tensions with trading partners.

In recent years, the bulk of domestic savings have been used domestically, despite China’s weakening demand. This has seen a growing proportion of credit being funnelled into the real estate sector, fuelling expectations of continuously rising prices in some second and third-tier cities, Raiser said.