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July 26, 2017

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China SOEs deleveraging on the fast track

LOWERING the leverage ratio of Chinese state-owned enterprises, which are responsible for more than half of corporate debt, will put China into the fast lane of preventing systemic financial risks.

State-owned enterprises will take the lead in controlling debt level and containing the leverage ratio, and further accelerate the clearing of “zombie enterprises,” according to the Xinhua-run Economic Information Daily, citing a source with the State-owned Assets Supervision and Administration Commission.

At the end of the first quarter, the leverage ratio of non-financial companies rose to 157.7 percent from 155.1 percent at the end of last year, a report from the National Institution for Finance and Development showed.

State-owned enterprises were responsible for about 60 percent of total corporate debt, the report estimated.

To defuse risks from fast corporate debt expansion, China has put deleveraging of state-owned enterprises high on its agenda, according to a national financial work conference earlier this month.

“The commission has attached great importance to risk control of central state-owned enterprises, and risk prevention provides a solid foundation for stabilizing growth,” said Shen Ying, chief accountant at the commission.

To reduce the leverage ratio, the commission has encouraged enterprises to optimize capital structure via public offerings on the stock market, and supported efforts in asset securitization, she added.

As an important means to reduce leverage in state-owned enterprises, debt-to-equity swaps have been accelerated, allowing companies with long-term potential to exchange their debt for stocks, the commission said.

Swap assets

So far, 12 centrally administered state-owned enterprises, including China Baowu Steel Group and China First Heavy Industries, have signed such swap agreements, which will help them deal with bad assets and reduce their debt burden.

Local state-owned enterprises are also making full use of this approach.

Two coal companies in north China’s Shanxi Province in March signed debt-to-equity swap agreements with the local state-asset regulator and the China Construction Bank, worth a total of 20 billion yuan (US$2.95 billion).

The deal will not only reduce their leverage ratio, but also facilitate their industrial transformation and upgrading.

Some companies have already received the funding from such swaps, including Huaibei Mining Group and Henan Energy and Chemical Industry Group.

China should also intensify efforts to clear out zombie enterprises, or economically businesses that are not viable, usually in industries with severe overcapacity and kept alive only with aid from the government and banks, according to the financial work conference.

Those poorly performing firms dependent on loans are the direct reason for high debt ratio of state-owned enterprises, analysts said.

“China should resolutely shut down zombie companies to release the occupied credit and production resources, and divert loans to emerging sectors and more efficient companies,” said Chang Xin, an expert with the National Institution for Finance and Development.

Strong performance in both China’s economy and state-owned enterprises is offering more room for the country’s deleveraging.

The official data showed combined profits of 102 central state-owned enterprises surged 15.8 percent year on year in the first half, while their total revenue rose 16.8 percent.

The country’s gross domestic product expanded 6.9 percent in the second quarter, flat from that in the first three months but better than market expectations.

“As the financial structure of central state-owned enterprises improves, they will see constant rises in the ability to ward off risks, growth quality and efficiency, as well as their core competitiveness,” Shen said.


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