Why China keeps bailing out ailing heavy industries
Debt dilemma reflects conflicting desires for prosperity that comes from free-market competition while ensuring state companies still dominate the economy
Drowning in debt, metals trader Sinosteel Corp got an unprecedented lifeline last month from the Chinese government - a multibillion-dollar debt-for-equity rescue that could be the first of many for struggling state-owned companies.
China’s economy is still growing relatively quickly, but a prolonged slowdown is raising fears that companies in many industries have borrowed and invested too much, too fast, posing a serious risk for the world’s second-largest economy.
The government hailed the Sinosteel deal, in which state-owned banks agreed to accept shares in the company to repay half the 60 billion yuan (HK$68 billion) it owes, as a model for debt reduction. Analysts are more sceptical. They say such manoeuvres are typical of the ruling Communist Party’s tendency to avoid bold action and support politically favoured state industry.
“They are still tinkering at the edge of the problem instead of tackling it head on,” said Mark Williams, chief Asia economist at Capital Economics.
Total debt owed by companies and households in China is estimated by private sector analysts to amount to 250 percent of annual economic output, high for a developing country and close to the levels of the United States and the European Union before the 2008 crisis.