China should tackle rising levels of corporate debt, says OECD
March 27, 2017 Category Finance, Weekly
China should urgently address rising levels of corporate debt to contain financial risks as it tries to rebalance its economy, the Paris-based Organization for Economic Cooperation and Development (OECD) said. Beijing should also step up efforts to retire “zombie” state firms in ailing industries to help channel funds to more efficient sectors and enhance the contribution of innovation in the economy, the OECD said in its latest survey of China’s economy. “Orderly rebalancing requires addressing corporate over-leveraging, overcapacity in real estate and heavy industries, and debt-financed over-investment in asset markets,” the report said. The OECD forecast China’s economy would grow 6.5% this year and 6.3% in 2018. The report warned of mounting financial risks as enterprises are heavily indebted, while housing prices have become “bubbly”. Corporate debt is estimated at 175% of GDP, among the highest in emerging economies, climbing from under 100% of GDP at the end of 2008, the report said. “Soaring property prices in the largest cities and leveraged investment in asset markets magnify vulnerability and the risk of disorderly defaults,” it said. “Excessive leverage and mounting debt in the corporate sector compound financial stability problems, even though a number of tax cuts are being implemented to reduce the burden on enterprises.” “Although the risks are rising, the firepower in the Chinese government is big enough and if there’s a problem, it’s able to sort it out,” Alvaro Santos Pereira, Director of the Country Studies Division at the OECD’s Economics Department said. Monetary policy should rely more on market-oriented tools and less on targeted government policy, the report concluded.
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