Deleveraging Elevated Corporate Debt in China Should Focus on Vulnerable Sectors and Financial Institutions
November 14, 2017 | Press release
Also available in Chinese (中文稿)
SINGAPORE, November 14, 2017 – Efforts to deleverage corporate debt in China should focus on reducing debt in several vulnerable sectors and financial institutions, says the ASEAN+3 Macroeconomic Research Office (AMRO) in its research published today.
According to AMRO’s study titled “High Corporate Debt in China: Macro and Sectoral Risk Assessments”, the ratio of corporate debt to GDP in China was estimated at 155 percent in 2016. The main drivers behind the rapid increase in corporate debt are structural and institutional factors linked to China’s stage of economic and financial development, country-specific characteristics as well as cyclical factors. These include the country’s high saving rate alongside underdevelopment of equity financing facilities, the presence of implicit guarantees on loans to State Owned Enterprises (SOEs), and the investment-driven growth in the post-GFC period.
Based on various financial indicators and nonperforming loan ratios, the bulk of corporate debt is not risky. However, vulnerabilities are concentrated in several sectors under the investment-led growth model with declining profitability and debt repayment capacities, such as SOEs in steel, mining, utility, transport, and manufacturing, as well as some private firms in real estate and construction. Manufacturing accounts for the most significant shares of total corporate debt at 20 percent, followed by real estate (15 percent), utilities (14 percent), construction (12 percent) and transport (12 percent).
Bank loans are still the main source of financing for corporates, but their share of total financing has declined while the shares of bonds and shadow banking loans have increased sharply to 20 percent and 16 percent respectively, especially in vulnerable sectors such as mining, real estate, and construction.
While high corporate debt is unlikely to lead to a systemic crisis in the short term, the authorities should take targeted and concerted efforts to reduce debt in the vulnerable sectors and financial institutions.
Structural reforms to increase investment efficiency, especially for SOEs, are crucial for constraining the rapid growth in corporate debt. Market-based debt-equity swap is an important way to reduce corporate debt.
As for sectoral policy, macro-prudential measures in the real estate sector should be maintained to rein in growing debt. In the utilities, transport, and construction sectors, Public-Private Partnership (PPP) can be an alternative source of financing.
Strengthening the buffers of financial institutions with high exposure to the vulnerable sectors can help mitigate risks. Deepening the stock markets will encourage corporates to use equity financing and reduce their reliance on debt financing in the medium term.
Further improvements to corporate and financial sector data are crucial for more comprehensive and effective risk assessment and monitoring, AMRO recommends.