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China economy
EconomyChina Economy

Debt at China’s state-owned firms in spotlight as credit tightening raises default pressure

  • Chinese state firms defaulted on 71.8 billion yuan (US$11.1 billion) worth of debt in 2020 – the largest total since China allowed defaults in 2014
  • Analysts say any defaults of weak state-owned enterprises would be highly contagious and impact the entire credit market

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Some state-owned enterprises in China, including in the coal industry, continue to suffer from falling prices and bloated workforces. And transforming them to commercially viable businesses has been slow. Photo: Reuters
Amanda Leein Beijing

China’s big state-owned firms are likely to face growing pressure to make payments on their debt this year as Beijing moves to tighten credit growth, government researchers and analysts said.

Last year, Chinese state firms defaulted on 71.8 billion yuan (US$11.1 billion) worth of debt, accounting for 51 per cent of all defaults, and the largest default total for state firms since China first allowed onshore bond defaults in 2014, according to data from the National Institution for Finance & Development (NIFD), a government-linked think tank.

“[The data] actually confirms our long-standing view that the [challenges facing the] Chinese economy involve solving the problems of state-owned enterprises to a considerable extent. [This is the same situation] in the real economy and in the financial sector,” said Li Yang, chairman of the NIFD, at a seminar on China’s bond market in Beijing on Tuesday.

In fact, credit growth in China reached a peak in the last quarter of 2020, and it is now showing signs of slowing down. Overall, national credit growth, based on total aggregate financing data – which measures fund flows from the financial sector to non-financial sectors in the forms of loans, bonds and trust investment plans – slowed for the second straight month to 13.3 per cent year in December from a year earlier, according to data released this week by China’s central bank.

“We believe a managed tightening is in sight, as Chinese policymakers carefully balance growth and risks. For now, policymakers are maintaining a cautious, calibrated approach to policy easing, which is reflected in tighter financial conditions at this stage of the recovery. In the past, calibrating policies to balance growth and financial stability have led to stop-go credit-driven business cycles in China,” US rating agency Standard & Poor’s said in a note on Wednesday.

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