Bad corporate-debt in China equal to around 7% of GDP

Baku. 11 June. REPORT.AZ/ Soaring corporate debt is a serious and worsening problem in China that needs to be tackled quickly if Beijing wants to avoid potential systemic risk to itself and the global economy, Report informs, a senior International Monetary Fund official warned.

While China’s total debt of around 225% of gross domestic product isn't particularly high by global standards, its corporate debt at approximately 145% of GDP is high by any measure, the multilateral lending agency said.

“Mounting corporate debt is a key fault line in the Chinese economy,” David Lipton, the IMF’s First Deputy Managing Director, said in remarks prepared for delivery at a conference in the southern Chinese city of Shenzhen on Saturday. “Corporate debt remains a serious—and growing—problem that must be addressed immediately and with a commitment to serious reforms.”

The experiences of countries who saw a massive buildup in debt in the past underscore the need to act quickly and effectively to deal with both creditors and debtors, and to tackle governance problems in the corporate and banking sectors that led to the problem in the first place, Mr. Lipton said.

A defining characteristic of China’s situation is its state-owned enterprises, which by IMF calculations account for around 55% of corporate debt but only produce 22% of economic output. Last year, SOE profits fell 6.7% year on year while their total revenue fell 5.4%, according to Chinese government data.

In an environment of slowing economic growth—China’s economy grew 6.7% in the first quater, its slowest pace since the global financial crisis—declining earnings and rising debt undermine the ability of companies to pay suppliers or service their debt, leaving banks holding more nonperforming loans, according to Mr. Lipton. China’s potential level of bad corporate-debt is at a “conservative estimate” equal to around 7% of GDP, the IMF said.

“The past year’s credit boom is just extending the problem,” Mr. Lipton said in a speech prepared for the China Economic Society Conference on Sustainable Development in China and the World. “Already many SOEs are essentially on life support.”