Heavily-indebted State-owned Enterprises the “Priority of Priorities” for China’s Deleveraging

The State Council has reiterated its focus on slashing debt and overcapacity in China’s immense state-owned enterprise sector as part of ongoing efforts to deleverage the economy and prevent systemic financial risk.

State media reports that Premier Li Keqiang convened a meeting of the State Council on Wednesday which indicated¬†that regulators should seize the opportunity provided by the strong first half performance of central SOE’s to make them the “priority of priorities” when it comes to deleveraging measures.

According to Chinese state media the State Council¬†“arranged work for the deepening of central SOE deleveraging, proposed the necessity of establishing a strict debt-asset ratio warning line control system for each industry, and strictly controlling the relevant investment projects of heavily indebted central SOE’s.”

Those SOE’s whose debt-asset ratios are above the warning threshold will see the index given greater weight in annual performance assessments, while the central government will also strictly control investments in non-essential undertakings, and prohibit those investment projects that serve to drive debt levels higher.

The State Council also indicated that it would strengthen accountability systems in relation to SOE leverage, and pursue executives for liability in the case of major losses or adverse impacts caused by debt burdens.

In addition to stepping up deleveraging and debt control measures, the State Council said that it would expand efforts to rein in industrial overcapacity from China coal and steel sectors to a slew of other areas, including power generation, electrolytic aluminium and construction materials.

Non-financial SOE’s the most leveraged area of the Chinese economy

Figures from the China Academy of Social Sciences indicate that as of the end of 2015 the leverage levels of the financial sector, household sector, government sector (including local government finance platforms) and the non-financial enterprise sector were 21%, 40%, 57% and 156% respectively, while SOE debt accounted for 70% of non-financial enterprise sector debt.

China’s SOE’s have managed to run up immense debt levels over the past decade, enjoying privileged access to funds in a financial system dominated by government-controlled lenders.

Non-financial SOE debt has seen accelerated increase over the past two years, with Ministry of Finance data indicating that SOE total debt growth rose to 19% in September 2015, and outpaced total asset growth continuously until May of this year.

Surging SOE debt levels prompted Chinese regulators to launch a concerted deleveraging campaign towards the end of 2016, which has since borne modest fruit,

Xiao Yaqing, head of the State-owned Assets Supervision and Administration Commission, said in March that the total debt-asset ratio of China’s then 102 central SOE’s was 66.6%, for a decline of 0.1 percentage points compared to the previous year.

A total of 12 central SOE’s had debt-assets ratios in excess of 80%, while 4 had levels over 85%.

The strong performance of the SOE sector in the first half of 2017 helped to further reduce the debt-asset ratio 0.2 percentage points in July compared to the start of the year.

The operating revenues of Central SOE’s posted a year-on-year increase of 16.8% in the first half to hit 12.5 trillion yuan, and a 15.8% rise in profits to reach 721.8 billion yuan.

 

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