China’s Fix for Massive Corporate Debt: Sell More Stock

Inside RTB Bor Copper Plant
Pure copper cathode sheets are removed from tanks in the electrolytic refining plant, or tankhouse, at the copper mining and smelting complex, operated by RTB Bor Group, in Bor, Serbia, on Friday, Aug. 24, 2012. Copper declined, trimming a third weekly advance, on concerns over the progress in solving Europe's debt crisis, disappointing U.S. data and further tightening measures in China's property market. Photographer: Oliver Bunic/Bloomberg via Getty Images
Photograph by Oliver Bunic — Bloomberg via Getty Images

The reform-minded head of China’s central bank says the country is swimming in too much corporate debt.

The rare warning of rising debt levels came Sunday at a Beijing conference between foreign CEOs and China government officials, which included Alibaba’s Jack Ma and Facebook’s Mark Zuckerberg, who drew attention to the otherwise sleepy conference days earlier by posting a picture of himself and several bodyguards jogging through the city’s smog.

Central bank governor Zhou Xiaochuan said the share of corporate debt to GDP—160% in China and rising, according to the OECD, more than double the U.S. ratio—is “too high” and susceptible to risks.

The problem is most acute in China’s limping old industries: cement, coal, oil and gas. Already inefficient state-owned companies have been forced to take on more debt as China’s building economy has slowed and commodity prices have crashed. Some are being called “zombie companies.”

Zhou’s solution to the corporate debt problem is what drew the most attention. Zhou said Chinese companies need to go out and issue stock.

As easy as it was to dismiss, there is evidence Zhou is correct in telling Chinese companies to raise more equity capital.

Stock sales account for less than 5% of total corporate fund-raising; bank loans and retained earnings remain by far the biggest sources of investment funds, says Arthur Kroeber of Gavekal Dragonomics. Most loans come from state-owned banks giving sweetheart, low-interest-rate loans to state-owned companies.

Zhou wants businesses to hit the capital markets for funding.

The arising problem is that those are the same markets manipulated by government propaganda and bailouts, and undoubtedly considered rigged by millions of smaller investors who were burned by last summer’s crash. The government may find itself propping up stock prices again—thereby bailing out the very companies it would encourage to find private capital in the markets—unless it can quickly restructure the ailing companies. Reports that China could layoff five to six million workers at state-owned companies in coming years would be a start in that direction. Reuters recently reported officials as saying that China was drafting new regulation to allow banks to convert non-performing loans into equity.


If China wants to rid itself of rising corporate debt, one of the consequences of lending from one state-owned company to another, going to the markets is one answer.

But then China needs to prove its stock markets are trustworthy enough for investors to take the bait.

That’s a more difficult proposition for Zhou and China.

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