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A Thomson Reuters study shows that the corporate debt of China has reached a level which threatens its economic growth.
The study claims that the country is sitting on the world biggest corporate debt, valued at about $16.1 trillion and still accumulating. If accurate, this would amount to 160 percent of the country’s GDP. Moreover, China’s corporate debt is also estimated to grow by 77 percent by 2020 according to Standard & Poor estimates, up to a whopping $28.8 trillion.
Analysts are pointing out that corporate debt growth is significantly affected by the government’s interventionist policy; but until now Beijing has only worked towards supporting economic growth on a whole and did not take warranted steps to decrease the load on its corporate sector. However, the country’s economic growth in 2015 is estimated to be the lowest in the last 25 years, and a big reason for it is the country corporate woes.
The government has cut interest rate four times in the last eight months, and has also removed lending deposit limits for banks, in an attempt to set more credits in motion and direct them to small companies and rising sectors. However, this also opens the risk of it ending up towards problematic companies, further encapsulating them into debt. It’s is as such possible that a big chunk of the $282 billion which Chinese banks have offered as loans in June has actually gone towards companies which will not afford to pay them back by the schedule.
It is also noted that a large amount of lending goes towards China’s state owned enterprises, which have created a reputation for themselves as being notoriously unprofitable and inefficient, but get tasked with numerous infrastructure projects. Manufacturing companies are also amongst the hardest hit by debt, with their debt – core profit ratio almost doubling in the last couple of years, from 2.8 in 2010 to 5.4 at the end of 2014.
If the recent Chinese stock market plunge which has shifted attention towards the country was feared to possible be a catalyst for an imminent crisis, China’s corporate debt is the long-term towards the same outcome. The government may have manage to impose enough urgent measures to stop the stock market bubble from bursting, but its ineffective approach at managing corporate debt may bring it soon into a no-escape situation, crashing its market liberalization dreams before they have time to plant their feet into the ground.
Image Source: fastcompany.com
