Mar 24, 2018 04:53 PM

Deleveraging Campaign to Focus on Disguised Lending, Government Think Tank Head Says

China will focus on addressing the problem of debt disguised as equity investment and aims to make strides in reducing state-owned enterprises’ (SOEs’) borrowing this year as it deepens its deleveraging campaign, a senior government advisor said Saturday.

Authorities will mainly target the widespread practice of disguising lending as equity investment in the deleveraging drive because such acts conceal debt risks and will cause a lot of problems in future, Li Yang, president of the National Institution for Finance & Development, a government think tank, said at a forum in Beijing Saturday.

They are expected to make significant inroads this year into bringing down the leverage ratio of SOEs, particularly letting money-losing, debt-laden “zombie” companies fail, he said at the Economic Summit of the China Development Forum 2018. He explained that the success of this effort is “crucial” to the maintenance of financial stability and the overall reform

The debt ratio of private non-financial companies in China is relatively low and deleveraging in the sector has been rapid since the global financial crisis. However, the leverage ratio of SOEs, which have long enjoyed better access to bank loans, remains high and “has continued to rise,” he said.

“We still face a daunting task to deleverage,” Li said. “I believe rather big progress will be made this year in deleveraging SOEs, especially the handling of zombie companies.”

Even though the debt-to-GDP ratio of China’s non-financial enterprises declined by 2.4 percentage points last year to 152.7%, that of the SOEs continued to go up, he said. Li did not provide a comparable figure for SOEs.

Nonetheless, he said the Chinese government has ample resources with which it can control the debt problem and prevent any spillover of the issue to the outside world, because it possesses enormous assets and the country’s savings rate has remained high.

China’s sovereign assets totaled 241.4 trillion yuan ($35.8 trillion) at the end of 2016, while its sovereign liabilities amounted to 139.6 trillion yuan, leaving its net assets at 101.8 trillion yuan, according to figures from the NIFD. Even if non-liquid assets such as land and buildings are excluded, the country’s net sovereign assets are still high at 20.7 trillion yuan, he said.

“And overall savings in China are higher than its investment. Therefore we are able to resolve any possible debt problem within the country,” he added.

Contact reporter Fran Wang (

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