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Assessing China’s Corporate Sector Vulnerabilities

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Assessing China’s Corporate Sector Vulnerabilities

IMF,

5 min read
5 take-aways
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What's inside?

Rising debt in China’s private companies and state-owned enterprises could spell trouble if interest rates rise and real estate values fall.

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Editorial Rating

7

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Chinese firms have ramped up borrowing to finance growth in recent years, raising concerns about the impact of increased debt on the country’s economic progress and financial stability. According to Standard & Poor’s, China overtook the United States to become the world’s biggest corporate borrower in 2013. At the same time, the corporate cash flow to service this growing burden has weakened. Are China’s companies facing a downfall if interest rates rise or real estate values decline? International Monetary Fund economists Mali Chivakul and W. Raphael Lam offer an authoritative answer to this conundrum. getAbstract recommends their comprehensive report to economists, analysts, executives and investors with interests in China’s financial future.

Summary

Prior to the global financial crisis, China’s private firms and state-owned enterprises (SOEs) typically funded their businesses through retained earnings. Since 2008, however, when the crisis choked profitability, companies have increasingly borrowed from banks and from nonbank sources via trust loans and corporate bonds. But while private listed firms have reduced their borrowing relative to equity, SOEs’ leverage has soared, particularly in the real estate, construction, mining and utilities sectors.

Most Chinese borrowing firms...

About the Authors

Mali Chivakul is a senior economist at the International Monetary Fund. W. Raphael Lam is an economist and resident representative at the IMF’s Beijing office.

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