BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/13
The extended delay in payments, along with weaker profitability and outlook, has raised concerns about the ability of companies to service debt in a timely manner. Banks have seen an increase in nonperforming loans and in recent weeks, also central bank governor Zhou Xiaochuan has begun to warn of a debt problem. The Bank for International Settlements (BIS) reports that Chinese firms have taken on exceptionally large amounts of debt compared to companies in any other countries.
To reduce corporate debt burdens, premier Li Keqiang has proposed that companies having trouble paying their loans could pay them with their shares. Banks have low enthusiasm for the proposal, however, because it would make them owners of their debtors’ problems. In any case, the issue is no longer hypothetical: struggling shipbuilder Huarong Energy last month swapped $2.7 billion in debt for its shares. The company’s creditors now own a 90 % stake in a company that in 2014 lost over a billion dollars in an industry struggling with overcapacity. When the equity-for-debt swap was last used to mop up the effects of the Asian financial crisis, commercial banks were generously recapitalised by the government.
China’s debt structure, % of GDP
Sources: BIS and IMF. Public sector debt includes local government off-budget investment vehicles. * BOFIT estimate