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China's SOEs Are Stuck In A Debt Trap As Economy Slows, Report Says

MELBOURNE (S&P Global Ratings) Sept. 20, 2022--The economic slowdown underway in China is contributing to a rising number of China's corporates and state-owned enterprises (SOEs) mired in a debt trap of high indebtedness and low earnings, S&P Global Ratings said in a new report, titled "Global Debt Leverage: China's SOEs Are Stuck In A Debt Trap."

"Many of China's overleveraged SOEs are caught in a debt trap that will likely require external intervention," said Terry Chan, senior research fellow at S&P Global Ratings. "The slowdown in China's economy is making operations more challenging, and many SOEs and other corporates will find it hard to grow their way out of their heavy debt burdens.

The authorities' task in resolving the corporate debt overhang, without causing economic chaos, is a very difficult one."

The report details the results of a stress test of higher inflation and interest spreads on 6,363 Chinese corporates. The sample has debt totaling US$15.6 trillion or more than half of China's total corporate debt of US$29 trillion, which is the largest in the world and about equal to the size of total U.S. government debt. China SOEs are a third of the sample by count, but carry 76% of the debt.

Mr. Chan said: "Our study shows the hardest hit won't be confined to just real estate. We're seeing increasing warning signs of rising stress emerge for the industrials sector, including construction and engineering, as well as for the consumer discretionary and consumer staples sectors. Low earnings and heavy debts are common strains.

"Although some corporates may escape the debt trap because of government intervention, there will be significant pain and it won't be quick.

We believe the Chinese government could impose a cap on the ratio of net debt to equity for all mid-to-large corporates, as they did for property companies. But it's uncertain whether the level of economic growth that would be acceptable to Beijing could be achieved while debt is being decreased."

Mr Chan added: "The Chinese government had in recent years preferred to resolve corporate over-leveraging through market-driven initiatives. However, in an economic downturn, this approach becomes more difficult to execute. Consequently, we expect to see higher levels of problematic assets, and potentially defaults."

This report does not constitute a rating action.


S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

The report is available to subscribers of RatingsDirect at If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at Members of the media may request a copy of this report by contacting the media representative provided.

Credit Research:Terry E Chan, CFA, Melbourne + 61 3 9631 2174;
Eunice Tan, Hong Kong + 852 2533 3553;
Media Contacts:Michelle Lei, Beijing + 86 10 6569 2961;
Richard J Noonan, Melbourne + 61 3 9631 2152;

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