IMF sees SOEs’ high debt ratio risky in slowdown
Print Edition
CHINESE state-owned enterprises have increasingly taken on more debt to finance new investment since the global financial crisis in 2008, leaving the corporate debt sector vulnerable to a slowdown in the real estate and construction sectors, according to a research by the International Monetary Fund.
China’s corporate debt rose by more than 30 percentage points to about 150 percent of gross domestic product at the end of 2013 from 2009, as firms maintained level of investment even as profits fell. Companies usually re-invest profits to fund new projects, but have turned to borrowing as earnings fell amid the global financial crisis and its impact on the global economy.
The IMF working paper, “Assessing China’s corporate sector vulnerabilities,” found that SOEs had largely kept their debt-to-equity ratio over the period, although borrowings rose among real estate and construction firms.
In contrast, privately owned firms had largely cut their debt-to-equity ratio to about 55 percent by the end of 2013 from 125 percent four years earlier.
One of the reasons behind the rise in debt was the cut in global interest rates as several major central banks adopted zero interest rate policies amid the global financial crisis.
“In the aftermath of the global financial crisis, both private and state-owned real estate and construction firms seem to have enjoyed lower borrowing costs than firms in other sectors,” the report said.
But a major slowdown in the real estate and building sectors could put those companies under “significant financial distress with their debt at risk of rising sharply” by reducing their ability to repay that debt, according to the report.
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