Planner: China must act to reduce high corporate debt

BEIJING: China must take action to reduce corporate debt levels, with an aim to stabilising them in the near – and medium-term, the country’s state planner said yesterday.

Corporate China sits on US$18 trillion (RM74.6 trillion) in debt, equivalent to about 169% of GDP, and international institutions have recently warned Beijing to stop financing weak firms, especially inefficient state-owned enterprises, which tend to crowd out the private sector.

More defaults also are needed, they say, to improve credit allocation and stop wasteful spending in the economy.

High debt levels have added to operating difficulties for some Chinese firms, increasing their debt risks and financial risks, the National Development and Reform Commission (NDRC) said in a document released during a news briefing in Beijing.

China will allow firms to develop equity financing and conduct marketoriented debt-to-equity swap process in an orderly way, the document said.

However, the swap is not a “free lunch” for troubled companies, NDRC’s vice-chair Lian Weiliang said during the briefing. The government will not be responsible for losses accrued during the swap process, he added.

“Zombie” firms are strictly forbidden from conducting debt-to-equity swaps.”

China will also step up checks at state-owned firms in order to reduce debt levels.

However, banks cannot be forced to conduct the swaps, Lian said.

Dai Bohua, assistant minister at the Ministry of Finance said the government will prevent shift of risks from non-financial firms to banks under the debt-to-equity swaps.

The government will also allow firms to go bankrupt according to the law, the NDRC said.

According to a recent Reuters analysis, profits at roughly a quarter of Chinese companies were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.