Should We Worry About Chinese SOEs?
|Executive Summary
Leverage in the non-financial corporate (NFC) sector in China has risen sharply over the past decade. Concerns about the country's state-owned enterprises (SOEs) wax and wane, but angst has dissipated over the past year or so due to the stabilization in China's rate of economic growth. However, we think it would be premature to state that Chinese SOEs are "out of the woods." There already are signs that economic growth in China may be inching lower anew. Should capital outflows pick up sharply again, authorities may need to tighten liquidity in an effort to staunch the outflow. Leveraged SOEs could be vulnerable to a rise in interest rates, potentially leading to renewed market angst about their financial health and the outlook for the Chinese economy.
Chinese Companies Have Levered Up in Recent Years
Financial market participants fixate at times on the financial condition of Chinese SOEs due to the adverse effects that these large companies could potentially have on the Chinese economy if they encounter financial difficulties. As shown in Figure 1, the debt-to-GDP ratio of the NFC sector in China has risen from less than 100 percent about a decade ago to more than 160 percent at present. Although the NFC sector in China includes millions of privately-owned companies, SOEs account for a significant proportion of NFC debt as we describe in more detail subsequently.
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