China should urgently address rising levels of corporate debt to contain financial risks as it tries rebalance the nation’s economy, the Paris-based Organisation for Economic Cooperation and Development said on Tuesday. Beijing should also step up efforts to retire “zombie” state firms in ailing industries to help channel funds to more efficient sectors and enhance the contribution of innovation in the economy, the organisation said its latest survey of China’s economy. “Orderly rebalancing requires addressing corporate over-leveraging, overcapacity in real estate and heavy industries and debt-financed overinvestment in asset markets,” the report said. It forecast China’s economy would grow 6.5 per cent this year and 6.3 per cent in 2018. The report warned of mounting financial risks as enterprises are heavily indebted, while housing prices have become “bubbly”. Beijing unveils plan to tame soaring corporate debt Corporate debt is estimated at 175 per cent of GDP, among the highest in emerging economies, climbing from under 100 per cent of GDP at the end of 2008, the report said. “Soaring property prices in the largest cities and leveraged investment in asset markets magnify vulnerability and the risk of disorderly defaults,” it said. “Excessive leverage and mounting debt in the corporate sector compound financial stability problems, even though a number of tax cuts are being implemented to reduce the burden on enterprises. Alvaro Santos Pereira, director of the country studies division at the OECD’s economics department, said at a briefing on the report: “Although the risks are rising, the firepower in the Chinese government is big enough and if there’s a problem, it’s able to sort it out.” The report called for better and more timely fiscal data releases and to expand funding in health and education. Monetary policy should rely more on market-oriented tools and less on targeted government policy, it said. China’s spiralling local government debt still out of control, says outspoken lawmaker China is trying to boost the services sector and encourage greater innovation in the economy, partly through promoting greater entrepreneurship and the commercial use of the internet. Official data shows more than 100,000 new firms were registered each day last year in China, but the report said there were too many unviable firms and the progress on scrapping zombie state-run companies was modest. It cited a research report published last year saying that nearly half of steel mills and half of developers were making losses, but could still obtain loans. Zombie companies, mainly state-owned enterprises in industries plagued by excess capacity, have aggravated credit misallocation and dragged down productivity, the report said. The State-owned Asset Supervision and Administration Commission said last year it aimed to close 345 zombie firms in the coming three years. The report said the number was “rather modest” given that the commission controls about 40,000 companies. It added that the government should remove implicit guarantees to state firms as a way to stop corporate debt from piling up and that bankruptcy laws should be improved to help phase out zombie state firms. China is increasing spending on research and development, but innovation does not significantly contribute to growth, the report said. Despite the soaring number of patents, “only a small share are genuine inventions”. The utilisation rate of university patents is only about five per cent compared to 27 per cent in Japan. “Only a fraction of Chinese patents are registered in the United States, the European Union and Japan and Chinese researchers are weakly linked to global networks,” the report said. Margit Molnar, chief China economist and lead author of the report, added: “The internet should be faster and cheaper.” The report suggested government support for innovation should extend to more sectors rather than strategically important projects and high-tech industries. OECD raises global growth forecasts on expected Trump stimulus The OECD has 35 member countries, with China a strategic partner. The organisation has a stringent set of criteria for membership based on data transparency and other factors including oil reserve levels. The attraction of membership for China has waned as it favours involvement with other international organisations, including the International Money Fund and the G20 group of industrialised nations. “The OECD is no longer a rich men’s club. It is important the OECD is becoming more and more global because the world has been changing dramatically over the past years,” said Pereira. “China is looking at the OECD, hopefully, with increasing interest.” He added the organisation had close cooperation with the Chinese authorities. “We welcome that,” he said.
