China & Its Rising SOEs’ Debt

13 Feb

Wu Jinglian, one of China’s most renowned economists has recently stated that China faces a problematic year as it continues to confront a host of problems that have amassed over the past decade.

It was during a recent forum in Beijing that Mr. Wu notified fellow economists that the Chinese government had to respond to the rise of ‘troubled’ state owned enterprises (SOEs). These firms are unsettled in the sense they are facing high levels of debt and piquantly depend on government subsidies in order to survive – accordingly, they have been coined as “dead companies” (Forsyth 2014).

Throughout the 1990s, the Chinese economy underwent a reformation, whereby China’s leaders revamped the country’s SOEs in a bid to increase their efficiency and competitiveness against foreign rivals. The result, however, ended with millions of workers being laid off from declining factories, alongside the government moving decades of accumulated debt into asset management companies. Under the government, SOEs in various industries were entitled quasi-monopoly status; in other words, they were endowed significant market power which enabled them to acquire smaller, private rivals. This sparked a trend known in Chinese as ‘goujin mintui’, meaning “the state advances and the private sector retreats” (Rabinovitch 2012). Owing to their status, SEOs are often viewed as a ‘safer’ investment than private companies, thereby receiving greater funds from banks (Forsyth 2014).

And they borrowed. Throughout the past decade SEOs have financed a ‘building boom’ racking up $2.95trillion in debt obligations. Analysts at Standard Chartered PLC estimated that Chinese corporate debt was “equivalent to 128% of China’s GDP” at the end of 2012, rising from 101% by the end of 2009 (Mcmahon & Murphy 2013). Standard & Poor’s (2013, p. 56) reported that a “substantial portion” of China’s debt belonged to state-owned enterprises. While accessible loans may be well received by China’s besieged firms, the future may not look as promising. If borrowers are not able to meet their financial obligations, such heavy debt could foster serious problems for the economy; for instance, companies could be forced to amalgamate, which could lead to momentous job losses, or force leaders into an expensive bailout.

Mr. Wu concluded that a necessary economic pathway could start with curbing China’s SOEs’ debt through “equal treatment”. Thus, operating in a system that promotes “fair competition” between SOEs and private firms.


Forsyth, M. (2014): “A Leading Chinese Economist Warns of a Difficult Year and ‘Dead’ Companies”. The New York Times, 11 February 2014 [Online]. Available at: [Accessed: 12th February 2014]

Mcmahon, D. & Murphy, C. (2013): “Chinese Firms Shrug at Rising Debt”. Wall Street Journal, Wall Street Journal, 4 February 2013 [Online]. Available at: [Accessed: 12th February 2014]

Rabinovitch, S. (2012): “Private Sector Battles March of Chinese State”. Financial Times. 11 November 2012 [Online]. Available at: [Accessed: 11th February 2014]

Standard & Poor’s. (2013): “China’s Top 150 Corporates”, Standard & Poor’s, 1 September 2013. McGraw Hill Financial. p. 56


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