China’s state-owned enterprises (SOEs) are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s.
“In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials and shipbuilding industries,” S&P analyst Christopher Lee wrote in a report on Monday. “We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.”
The warning follows S&P’s decision earlier this month to cut China’s sovereign rating outlook to “negative” from “stable” because economic rebalancing is likely to proceed more slowly than it had expected.
Moody’s Investors Service also downgraded the outlook to “negative” last month, highlighting surging debt and the government’s ability to enact reforms.
The revisions were biased, Chinese Minister of Finance Lou Jiwei (樓繼偉) said in Washington on Friday.
Chinese Premier Li Keqiang (李克強) has pledged to withdraw support from so-called “zombie firms” that have wasted financial resources and dragged on economic growth, which is at the slowest in a quarter of a century. China’s central bank has lowered benchmark interest rates six times since 2014, underpinning a jump in debt to 247 percent of GDP.
China Railway Materials Co (中國鐵路物資), a state-backed commodities trader, is seeking to reorganize debt and halted trading on 16.8 billion yuan (US$2.6 billion) of bonds this month. Baoding Tianwei Group Co (保定天威) last year became the first government-backed company to renege on onshore bonds. Sinosteel Corp (中國中鋼) defaulted on onshore debt in October last year.
Leverage among the largest state-owned enterprises has reached a “critical” level, Lee said.
It is likely to worsen this year because a weak top line is not fully offset by cost cuts and capital expenditure reductions, he wrote in the report.
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