SOE Debt Levels Could Imperil China’s Finance System


One of China’s leading experts on risk in its financial system has pointed to high debt levels amongst state-owned enterprises as a major potential threats to stability.

Speaking at the the release of Tsinghua University’s  “2017 China Systemic Financial Risk Q1 Report” over the weekend,  Li Yang, vice-head of the China Academy of Social Science said that the Chinese economy suffered from abnormal credit patterns when it came to state-owned enterprises.

“Particularly when it comes to corporate leverage, we have discovered an extremely abnormal phenomenon,” said Li. “When the economy is slowing, non-state owned corporate leverage begins to fall, while state-owned enterprise leverage rapidly rises.

“This does not satisfy the laws of a market economy – when capital and asset yields are falling, it’s disastrous for leverage rates to increase.”

Zhou Hao, professor and vice-head of Tsinghua University’s Wudaokou Finance School, said that the key reason for excessively high debt levels amongst China’s state-owned enterprises is that they are perceived as enjoying implicit guarantees from the government.

This means they can avail themselves of large volumes of credit when fiscal stimulus and loose monetary policy increase market liquidity during periods of economic weakness.

“For this reason, the ongoing revival of the economy has provided an opportunity for SOE reform that we didn’t have at all several years ago,” said Zhou. “We can address the problems of excessive accumulation of SOE debts under these beneficial circumstances.”

According to Li these problems with China’s bond market are in urgent need of remedy less they threaten the integrity of the financial system as a whole.

“At the end of last century and the start of this century the problem of high corporate debt levels began to emerge, showing that there has been no basic change in the systemic mechanism underlying this phenomenon, ” said Li.

“This time we definitely have to get rid of the foundation [of the problem].

“If in seven or eight years time another debt problem emerges, at that time we may lack the assets to fill in the gaps.”

Zhou Hao remains optimistic about the near-term health of Chinese economy, pointing to declines in systemic financial risk despite high overall levels of leverage following improvements to the real economy in the second half of last year, and low risk in relation to central government or personal debt.