Are China’s Big State Owned Firms Credit Worthy? There was a time when China’s biggest state-owned enterprises were seen as the country’s crown jewels. The government cleaned up the balance-sheets of the best of the firms, and listed their shares on stockmarkets at home and abroad. The firms were dubbed “red chips”, the supposed blue chips of state capitalism, by fawning analysts.
In fact, China’s big state firms were largely a bloated, inefficient and cosseted lot. The real dynamism in the Chinese economy has long come from its entrepreneurial private firms, which now account for perhaps two-thirds of the country’s entire economic output.
Thanks to weak commodity prices, a troubled property market and slowing economic growth, the outlook for all Chinese corporations is dimmer than it was a few years ago. But debt is a much bigger problem at the largest state firms. A report released on November 30th by Standard & Poor’s, a credit-rating agency, looks at 200 public and private Chinese firms in 18 industries and warns that the creditworthiness of many big state firms has worsened significantly. S&P found that the average ratio of gross debt to earnings (before interest, tax, depreciation and amortisation, or EBITDA) at state firms rose from roughly 3 in 2008 to over 5 last year.
The worries are most acute among metals firms, such as Hebei Iron & Steel, and transport companies, such as China COSCO, a shipping line. The agency gives both of those companies a maximum financial-risk rating of 6. The main exceptions to the trend, the report notes, are state firms in industries such as telecoms and energy, which the government protects from serious competition.
Private firms are not without their problems, although the ratio of gross debt to EBITDA at such firms remains below 4 on average. The property sector and “bricks-and-mortar” retailers have been hit hard of late, and private firms with exposure to them—such as Fosun, one of China’s largest private conglomerates—are also seeing a deterioration in their creditworthiness. But most private firms are in e-commerce, consumer businesses and technology services, which are less politicised industries that are still doing well.
The conventional wisdom has long been that China’s biggest and best-known state firms will never be allowed to default, no matter how weak their finances. But doubts are now creeping in. Christopher Lee of S&P, an author of the agency’s report, says, “there is a growing sense that the weakest are not default-free.” The question for officials now, he reckons, is “how to let them go without sparking a systemic meltdown.”
