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