Newfound profits to cut debt of SOEs

China will further reduce leverage at central State-owned enterprises by establishing multiple channels to reduce corporate debts, those at a State Council executive meeting chaired by Premier Li Keqiang decided on Wednesday.

In the first seven months of this year, central SOEs registered profits of 846.9 billion yuan ($127 billion), up by 16.4 percent year-on-year, compared with a 3.7 percent drop a year earlier. Central SOEs’ debt ratio was 66.5 percent in July, down by 0.2 percentage points from the start of this year, according to Stateowned Assets Supervision and Administration Commission of the State Council.

The performance by central SOEs in quality and efficiency improvements during the past two years has received full affirmation from Li.

“Central SOEs are the backbones of the economy. We need to conduct in-depth analysis to find key drivers that contribute to the transition to profits and consolidate the upward momentum,” Li said.

“We should seize the opportunity and step up the deleveraging of SOEs. Lower debts can benefit the whole economy,” he added.

Those at the meeting on Wednesday decided that the government will establish an alert line mechanism for debt ratios of different overly leveraged sectors. Central SOEs will face strict control in investments from their main business portfolios and in programs that could increase their debt ratios. Enterprises that see sharp profit growth will be urged to pay down debts.

The debt-for-equity swaps will be pushed forward in line with market rules and the law, and explore new marketbased models for the swaps. Agencies that implement the swaps will receive support to expand their funding channels.

Companies that are invested or run by State capital or qualified central SOE funds will be encouraged to take part in the swaps using various market channels.

Also decided at the meeting was that the government will carry forward supply-side structural reforms of central SOEs proactively, including absorbing excessive capacity in the steel and coal sectors and production reductions in sectors including thermal power and aluminum smelting. Removing insolvent “zombie” enterprises will also be a priority.

“Many central SOEs are engaged in traditional industries. During the transition between traditional and new growth engines, we need to achieve the transformation and upgrading into enterprises with lower leverage, lower debt and higher core competitiveness,” the premier said.