Limitations of China's Growth Patterns Revealed by Excess Debt
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Limitations of China’s Growth Patterns Revealed by Excess Debt
—SOE and housing speculation threaten the feet of the Xi Jinping administration—
By Yuji Miura
(hiraiwa.yuji@jri.co.jp)
Advanced Senior Economist
Economics Department
Japan Research Institute
Summary
1. The Chinese government has announced that it will change its stance on “implicit govern-
ment guarantees” and proceed with the liquidation of zombie companies. But there are still
many zombie companies, and the liquidation process is not easy. The government is not mov-
ing toward the abolition of “implicit government guarantees” but only temporarily reducing the
scope of coverage.
2. Debt default is not the “exit” from the resolution of the excessive corporate debt problem,
but the “entry point” of a long process toward resolution. The extent to which debt, including
bank loans, has been reduced must be examined to determine whether the liquidation of zombie
companies is progressing.
3. In the wake of the COVID-19 pandemic, the volume of outstanding total social financing,
which indicates the amount of funds supplied to the real economy, has recorded the most sig-
nificant increase since the collapse of Lehman Brothers. At the end of 2020, corporate debt out-
standing reached 163.2% of GDP, entering uncharted territory.
4. “Implicit government guarantees” are given not only to corporate bonds but also to bank
loans. Even if deleveraging proceeds, the problem of excessive debt will not be resolved because
debt is unevenly distributed to companies with low repayment capacity. The difficulty of raising
funds depends on whether or not the government has invested in them, and it can be said that the
problem of excessive debt is caused by state-owned enterprises.
5. State-owned enterprises have little presence in China’s real estate development. However,
the government cannot afford to sit back and watch the default or bankruptcy of real estate de-
velopers because the rise and fall of the real estate development industry, which accounts for a
high percentage of GDP, have a serious impact on the economy and society.
6. In response to the overheated real estate market, the government tried to control the inflow
of funds into the real estate market by regulating the total amount of real estate-related loans
and through the “three red lines,” which specify the debt reduction target. These efforts have
produced certain results.
7. The problem of the excessive debt of state-owned enterprises and soaring house prices has
never previously been a drag on economic growth. However, since the proportion of state-owned
enterprises in the economy has stopped falling, and it is difficult to expect a virtuous cycle in
which real estate investment and house prices continue to rise, China will be exposed to more
downward pressure than expected.
8. In order to prevent China from falling into a prolonged slump, it is essential to restructure
the ownership system of state-owned enterprises and control house prices by introducing real
estate and inheritance taxes. However, it is unlikely that the ownership system will be reformed.
In addition, while the government is willing to introduce a real estate tax, it may be undermined
by being a low tax rate.
2 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82Introduction bonds and financial bonds are stable, an increase
in corporate bond defaults does not destabilize
There have been frequent defaults in the Chi- the bond market. However, China’s outstanding
nese corporate bond market. According to Chi- corporate bonds stood at 4.5 trillion dollars at the
nese financial information service company Wind, end of 2020, second only to the 7.3 trillion dol-
the default amount for the period between January lars of the United States(7). The review of implicit
and mid-July 2021 was 160.9 billion yuan, higher government guarantees is expected to contribute
than the record 124.8 billion yuan for the same pe- to the soundness of the corporate bond market in
riod in 2020. In April 2021, the fear of default by the long run, but in the short run, it will depress
the non-performing loan disposal company, China the growth rate of the Chinese economy and ulti-
Huarong Asset Management Co., Ltd.(1), which mately that of the global economy.
was established with investment from the Ministry However, it is premature to conclude that an
of Finance, increased(2), leading to a widespread increase in corporate defaults is the result of the
view that the “implicit government guarantees,” government’s policy to eliminate implicit govern-
under which state-owned enterprises would even- ment guarantees. In China, there are still many
tually be bailed out, may be reviewed. so-called zombie companies (“僵屍企業” in Chi-
In September 2021, the fear of default by the nese) that have huge debts and lack the potential
Evergrande Group, one of the major property de- for business improvement. The increase in de-
velopers, revived(3), contributing to a worldwide faults is merely an emphasis on the government’s
decline in stock prices. The Evergrande Group stricter stance toward state-owned enterprises that
is a private enterprise, but it is the second larg- continue to be lax in management and banks that
est enterprise in the industry(4) based on the 2020 lend to such enterprises, and it cannot be seen that
comprehensive evaluation by the China Real Es- the government has turned to the abandonment of
tate Association (CREA). With total liabilities of zombie companies through the abolition of guar-
1,966.5 billion yuan as of June 2021(5), and for- antees.
eign investors also holding large amounts of dol- “Implicit government guarantees” is not a ques-
lar-denominated corporate bonds of the Group, at- tion of whether all state-owned enterprises should
tention was focused on whether the Group would be given guarantees or not, but rather a ques-
default and enter bankruptcy proceedings or some tion of how much the scope of such guarantees
other form of remedy would be taken. should be reduced. In fact, since 2014, when the
According to the Bank for International Settle- corporate bonds of Shanxi Zhenfu Energy Group
ments (BIS) statistics available for international Ltd., a state-owned enterprise, defaulted(8), and re-
comparison, China’s bond issuance at the end garded as the “China’s first year of corporate de-
of 2020 stood at 18.6 trillion dollars, the second faults(9),” the government has repeatedly expanded
largest in the world after the United States at 47 or contracted its implicit guarantees depending
trillion dollars. According to the People’s Bank on whether it placed more importance on the risk
of China, the central bank, China’s bond market of credit uncertainty or the impact on corporate
consists of three main components: 1) government financing. It is reasonable to regard this increase
bonds issued by the central government and local in defaults as a temporary reduction in implicit
governments; 2) financial bonds issued by finan- government guarantees that had been seen several
cial institutions, including public-sector financial times in the past.
institutions such as the China Development Bank; But that doesn’t mean we don’t have to take
and 3) corporate bonds issued by companies. this default seriously. The simple argument link-
As of April 2021, the proportion of outstanding ing an increase in corporate defaults to the degree
issues was 39.0%, 36.2%, and 24.7%(6), respec- of implicit government guarantees does not re-
tively, with corporate bonds accounting for one- veal the essence of problems faced by the Chinese
fourth of the bond market. Because government economy. Thus, this paper regards it necessary
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 3to examine the debt repayment capacity of enter- Fig. 1 C
hanges in Corporate Defaults
in China
prises in terms of total debt, including bank loans,
(Number of cases) (100 million yuan)
to find out why the problem of excessive debt has
300 3,000
not been resolved, and to look at the future growth
trajectory. 250
240
2,500
This paper first points out that (1.) an increase 226
in corporate bond defaults does not mean that im- 200 2,000
plicit government guarantees will disappear. Then, 150
164
130 1,500
it will be clarified that (2.) implicit government 2,411
guarantees on bank loans underlie the problem of 100
79 1,863
1,000
excessive debt, and that (3.) state-owned enter- 47
1,527
1,350
50 500
prises are the culprit. Then, (4.) the government’s
400 381
countermeasures against the overheating of the 0 0
2014 15 16 17 18 19 20
21
real estate market and their results will be verified (Y)
by focusing on real estate developers, where the Value (right scale) Number of cases (left scale)
problem of excessive debt is becoming more seri- Notes: Data for 2021 covers the period until July 19.
ous. Finally, (5.) the view will be presented that Source: Prepared by The Japan Research Institute, Lim-
ited based on Wind
the downward pressure on growth will intensify as
drastic policy changes are not expected although
China has entered a phase where the conventional
economic growth pattern is not working due to the which is four times more in number of cases and
reform of state-owned enterprises and the stagna- 3.5 times more in value than in 2017. As of mid-
tion of real estate development. July 2021, there have been 130 cases valued at
135.0 billion yuan in default, representing a 23.8%
year-on-year increase in the number of cases and
a 29.0% year-on-year increase in value, increasing
1. Implicit government guaran- at a pace that exceeds that of the previous year’s
tees will not disappear record-high increase.
As one of the reasons for this, the termination
of the financial support launched by the govern-
Although the market is increasingly concerned ment in response to the spread of the COVID-19
about the future due to a series of corporate bond is often mentioned. However, thanks in part to the
defaults, it is premature to think that implicit gov- small cumulative number of COVID-19 cases,
ernment guarantees will disappear as the liquida- China’s economic stimulus package was only
tion of zombie companies has not progressed. In 6.1% of GDP, much smaller than Japan’s 22.1%
addition, an increase in defaults is not likely to and the United States’ 25.5% (Fig. 2). It is reason-
intensify downward pressure on the Chinese econ- able to understand that the market is increasingly
omy. concerned about the future due to a new change
that the number of the default of corporate bonds
issued by state-owned enterprises(10) is increasing.
(1) Growing defaults and growing anx- In 2019, state-owned enterprises accounted for
iety only 7.1% corporate bond defaults in terms of
number of cases and 10.6% in value terms, but in
2020, they jumped to 38.1% and 43.9%, respec-
In China, corporate defaults have been occur- tively (Fig. 3). A typical example of default in cor-
ring frequently since 2018 (Fig. 1). In 2020, there porate bonds issued by state-owned enterprises is
were 226 cases and 241.1 billion yuan in default, that of Huachen Automotive Group Holdings, also
4 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82known as Brilliance Auto Group(11). a joint venture partner of BMW, a German auto-
Brilliance Auto Group is a state-owned enter- mobile manufacturer. As a result of a total of 14
prise established in 2002 with investment from defaults since October 2019, in November 2020,
the Liaoning provincial government and has three the Group applied to the court for and received “重
listed companies and more than 100 subsidiar- 整, “ a restructuring-type insolvency procedure in
ies. It is an automobile manufacturer selected as which the debtor makes repayment of debt while
continuously operating the business.
Although the ratio of state-owned enterprises
defaulting on corporate bonds declined in 2021,
Fig. 2 S
cale of Economic Stimulus many enterprises are believed to be on the verge
Packages in Response to the of default, as is the case with China Huarong As-
Pandemic set Management, which was introduced at the
(% of GDP)
beginning of this paper, and the situation remains
50
45
unpredictable. The case of China Huarong Asset
40 Management was seen as a sign that the govern-
35 ment was sending out a message that even state-
30
25
owned enterprises invested in by the Ministry of
20 Finance would not necessarily be bailed out. In
15 other words, it indicated the possibility that myths
10
5
such as “国企信仰,” which means state-owned en-
0 terprises would not default, or “剛性兌付,” which
U.K.
U.S.
South Korea
Indonesia
China
South Africa
Spain
France
Italy
Brazil
Germany
Canada
Japan
Australia
means bonds would be redeemed without fail,
could collapse.
Additional fiscal expenditure Loans and loan guarantees
Notes: Data from 2020 to March 17, 2021
Source: Prepared by The Japan Research Institute, Lim-
ited based on IMF [2021b]
Fig. 3 Breakdown of Defaulted Corporate Bonds (by Ownership
Type)
Based on the number of cases Based on value
(%) (%)
100 100
90 11.6 90 10.3
7.1
80 80 10.6
33.8 35.0
70 38.1 70
43.9
60 60
50 50
40 84.1 84.2 86.9
40 77.8
30 60.8 30 60.5
49.6 44.8
20 20
10 10
0 0
2018 19 20 21 2018 19 20 21
(Y) (Y)
Private State-owned Others Private State-owned Others
Notes: Data for 2021 covers the period until July 19.
Source: Prepared by The Japan Research Institute, Limited based on Wind
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 5(2) Review of guarantees is temporary zombie companies, and pushing them out of the
market in accordance with the law could have a
serious impact on the economy. According to my
Market uncertainty has been exacerbated by research of listed companies conducted when the
an increase in defaults on the corporate bonds of problem of excessive production capacity became
state-owned enterprises in response to the govern- apparent, the percentage of zombie companies be-
ment’s emphasis on the review of implicit govern- tween 2013 and 2015 was around 10%(15) (Miura
ment guarantees. [2017]). This issue has since lost attention, but
At the end of 2018, the National Development that doesn’t mean zombie companies are on the
and Reform Commission (NDRC), together with decline.
the Ministry of Industry and Information Technol- In the mining and manufacturing industries,
ogy and the Ministry of Finance, issued a “Notice the ratio of loss-making companies among com-
on Further Improvement of Debt Settlement Op- panies of a certain size or larger started to rise in
erations of ‘Zombie Companies’ and Companies 2018 and reached 26.2% in 2020 (Fig. 4). The
with Excessive Capacity.” It called for the liquida- definition of loss-making companies and zombie
tion of zombie companies in order to effectively companies is not the same, but as the former in-
prevent and resolve corporate debt risks and pro- creases, the latter will increase as a matter of fact.
mote improvements in the quality and efficiency While the Chinese economy is considered to have
of the economy(12). This was confirmed at a meet- recovered quickly from the COVID-19 pandemic,
ing of the politburo of the Central Committee of companies have been in a difficult situation where
the Communist Party of China in July 2019(13). the ratio of loss-making companies has risen and
Xi Jinping, General Secretary of the Central the amount of losses has increased even before the
Committee of the Communist Party of China, COVID-19 outbreak.
said at a seminar for party leaders held in Janu- Unless market-based defaults become the norm,
ary 2019 that the 14th Five-Year Plan (2021-2025)
had made a good start, but urged caution against
“black swans” and “gray rhinos(14).” The former
is a rare but devastating problem, while the latter Fig. 4 R
atio of Loss-making
Companies in the Mining and
is a highly probable and devastating problem that Manufacturing Industries and
is often neglected. Excess corporate debt and real Amount of Loss
estate bubbles attributable to implicit government (%) (Billion yuan)
guarantees fall into the latter category. 35 1,200
Despite the government and the Communist 30 1,000
Party calling for the liquidation of zombie com-
25
panies, they failed to meet expectations. The Peo- 800
ple’s Bank of China stated in its November 2020 20
600
Financial Stability Report that “zombie compa- 15
nies should be liquidated in accordance with the 400
10
law. The era when corporate survival depends on
200
‘faith’ is over, and the reconstruction of bond mar- 5
kets, where orderly market-based defaults become 0 0
the new norm, begins” (People’s Bank of China 2000 05 10 15 20
(Y)
[2020]). As there was a limit to getting the zombie Amount of loss (right scale)
Ratio of loss-making companies (left scale)
companies out of the market upon request, they
took a hard-line stance of enforcing the law. Notes: The ratio of loss-making companies is based on
annual average, while the amount of loss is based
Still, the liquidation of zombie companies is not on the amount at year end.
Source: Prepared by The Japan Research Institute, Lim-
expected to proceed easily. There are still many ited based on CEIC
6 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82the review of implicit government guarantees is 302nd among the top 500 Chinese enterprises by
only temporary. For this reason, it is clearly ir- sales amount in 2019(20). This indicates that it is
relevant to expect that the number of defaults will possible for large enterprises supporting a region
continue to increase as a result of the review of to be allowed to extend the redemption period
implicit government guarantees or that an increase even if they are not state-owned enterprises.
in defaults is a step toward enhancing the sound- It is said that only 7.2% of defaulting compa-
ness of the corporate bond market. nies (in terms of the number of cases) success-
The liquidation of zombie companies, which fully raise funds and repay the promised principal
began in 2016, was supposed to be completed in and interest(21), so it is clear that refinancing and
2019(16). That the issue is unresolved shows how postponing the redemption date are just postpone-
difficult it is to get zombie companies out of the ments of the problem. Nevertheless, there is a
market. In August 2021, it was decided that the constant movement to prolong the lives of zombie
state-owned enterprise China Huarong Asset Man- companies. In July 2020, central state-owned en-
agement, mentioned earlier in this report, would terprises established a credit guarantee fund for
issue new shares to China International Trust and central state-owned enterprises(22) with the aim of
Investment Corporation (CITIC), one of the cen- supporting each other in raising funds, and similar
tral state-owned enterprises, in order to strengthen funds have been established by state-owned enter-
its capital base and avoid default(17). prises and banks at the local level(23).
It should also be noted that even though the These credit guarantee funds institutionalize
number of defaults is increasing, measures have government guarantees that were supposed to be
been taken to avoid them in advance. In China, “implicit,” which clearly contradicts the govern-
creditors sometimes agree to refinance loans to ment’s message that zombie companies should
avoid default. liquidate. The government emphasizes that it does
One example of this is Evergrande Group. In not contradict the above message by excluding
November 2020, the Group agreed with creditors zombie companies from the scope of guarantees
to convert most of the 130.0 billion yuan bonds provided by the credit guarantee fund for central
that would be redeemed by the end of January state-owned enterprises(24). However, the distinc-
2021 into convertible bonds(18). Because demand tion between zombie and non-zombie companies
for real estate is stable against the backdrop of ur- is ambiguous, and there are concerns that the
banization and business performance is expected credit guarantee fund may be used to rescue zom-
to recover in the long run, creditors are believed to bie companies as a result of political judgments
have moved to avoid default. The Group is not a taking into account the importance of employment
state-run company, but the “myth” that real estate and industrial policy.
prices will continue to rise made it possible to re-
finance.
Another problem is that expectations for implic- (3) The pessimistic scenario is unlike-
it government guarantees tend to favor postpon- ly
ing the maturity rather than immediately entering
bankruptcy proceedings after default.
One example is Shandong Ruyi Technology In Japan, the prevailing view is that an in-
Group Co., Ltd., a major textile manufacturer. The crease in defaults in the corporate bond market
Group, known for its acquisition of Renown, has will result in downward pressure on the Chinese
agreed with creditors to extend the maturity of its economy. There is no doubt that the prices of low-
bonds due in March 2021 by three months(19). This rated bonds will decline (yields will rise) due to
Group is also not a state-owned enterprise, but stricter screening based on the issuers’ ability to
with more than 30,000 employees, it is one of the repay. The confusion surrounding the market has
leading enterprises in Shandong Province, ranking not abated, with the Evergrande Group’s default
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 7attracting attention in September 2021, following [2021]). According to the People’s Bank of China,
the default of China Huarong Asset Management, as of June 2021, yuan-denominated financial as-
and contributing to the simultaneous fall in global sets held by corporations and individuals outside
stock prices temporary(25). of China totaled 3.8 trillion yuan in both stock and
However, when looking at the corporate bond bond markets (Fig. 7). The assets held in the bond
market as a whole, it is premature to assume a market expanded 4.3 times from before the launch
pessimistic scenario in which defaults will con- of Bond Connect, a system for trading mainland
tinue to increase, which will impact corporate Chinese securities via Hong Kong established in
financing and put downward pressure on the Chi- July 2017.
nese economy. The Japanese media emphasized The valuation of corporate bonds is also stable.
the size of the Evergrande Group’s 1,966.5 billion The S&P China Corporate Bond Index, which
yuan debt, which is equivalent to 2% of China’s represents the performance of yuan-denominated
GDP, but at the end of 2020, the Group’s debt corporate bonds provided by Standard & Poor’s
due within one year was 335.5 billion yuan(26), ac- in the United States, has been rising since March
counting for only 4.2% of China’s total corporate 2021 (Fig. 8). At least as of the end of September
debt redemption in the same year. 2021, Evergrande Group’s default concerns had
Given that bond redemption will peak in 2021 not caused any significant volatility in the corpo-
(Fig. 5) and that the default rate of Chinese corpo- rate bond market.
rate bonds has been low, the pessimistic scenario Strong bond issuance is also a positive factor.
is not likely. The default rate, which is calculated According to the People’s Bank of China, bonds
by dividing defaulting bonds by maturing bonds, issued in 2020 increased 26.5% year on year to
remained at 0.3% in terms of the number of cases 53.7 trillion yuan (about 7.7 trillion dollars), the
and 0.5% in terms of value in 2020 (Fig. 6)(27), highest growth since 2016 (People’s Bank of
well below the international default rate for corpo- China [2021]). Of the total, government bonds
rate bonds of 2.7%(28). increased 75.0% year on year to 7 trillion yuan,
Chinese bonds have long been regarded as high- local government bonds decreased 7.2% year on
ly profitable investments that are not tied to bonds year to 6.4 trillion yuan, financial bonds increased
issued in developed countries (Xin [2021], Cheng 34.8% year on year to 9.3 trillion yuan, and cor-
Fig. 5 Redemption of Corporate Bonds Fig. 6 Changes in Default Rate
(100 million yuan) (%)
90,000 0.6
80,000
0.5
70,000
60,000 0.4
50,000
0.3
40,000
0.2
30,000
20,000 0.1
10,000
0.0
0 2014 15 16 17 18 19 20
2021 22 23 24 25 26 (Y)
(Y) Based on the number of cases Based on value
Source: Prepared by The Japan Research Institute, Lim- Source: Prepared by The Japan Research Institute, Lim-
ited based on local media reports ited based on local media reports
8 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82Fig. 7 D
omestic Yuan-denominated Fig. 8 S
&P China Corporate Bond
Financial Assets Held by Index
Corporations and Individuals (End of February 2014 = 100)
Outside China 140
(Billion yuan)
4,500 138
4,000
Bond Connect 136
3,500
134
3,000
2,500 132
2,000 130
1,500
128
1,000 3 6 9 12 3 6 9
500
2020 2021
0 (Y/M/D)
2014 15 16 17 18 19 20 21
(Y/M)
Source: Prepared by The Japan Research Institute, Lim-
Bonds Stocks Loans Deposits
ited based on materials from S&P
Source: Prepared by The Japan Research Institute, Lim-
ited based on materials from the People’s Bank of
China
porate bonds increased 25.8% year on year to 12.2 2. The problem of excessive debt
trillion yuan, indicating the strong performance exacerbates amid growing de-
of corporate bonds. Corporate bonds issued dur- fault
ing the period between January and July 2021 in-
creased by 2.7% from the same period of the pre-
vious year to 7.5 trillion yuan, maintaining posi- If implicit government guarantees are only a
tive growth despite a considerable slowdown. matter of degree, the debate must focus on wheth-
The market reaction to the Evergrande Group er an increase in defaults leads to a reduction in
issue seems to be overly sensitive from the per- excess debt through the liquidation of zombie
spective of the overall corporate bond market. companies. Using the case of Tsinghua Unigroup,
Behind this, there seems to be concern that the one of the leading semiconductor manufactur-
United States’ reversal of its quantitative easing ers, as an example, I would like to review how
policies (tapering) overlaps with the limits of eco- this problem should be viewed, and then point out
nomic growth of China, which had been signifi- that the problem of excessive debt is not being re-
cantly leveraged. The Chair of the Federal Reserve solved amid an increase in defaults.
Jerome Powell indicated in September 2021 that
the Fed will begin tapering by the end of the year.
If the United States moves to raise interest rates (1) Default is only an “entry point”
in 2023 as predicted, funds are expected to flow into the process of solving the ex-
out of emerging markets, including China. Fear of cessive debt problem—Case of
global shock waves from the Evergrande crisis is
Tsinghua Unigroup
a sign of market sentiment that worries about the
extent to which China will be able to prevent such
outflow of funds. The fact that the increase in corporate defaults
is not the result of the policy to eliminate implicit
government guarantees can be confirmed by look-
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 9ing back at the background behind Tsinghua Uni- a policy of soliciting strategic investors with to- group’s default and bankruptcy proceedings. Ts- tal assets of 50.0 billion yuan and net assets of inghua Unigroup’s case shows that expectations 20.0 billion yuan to take over the business was for “implicit government guarantees” still persist presented(34). According to the statistics of enter- in China, and that the liquidation of zombie com- prises in the mining and manufacturing industries panies does not proceed easily and, as a result, the for which statistics have been compiled, the total problem of excessive debt is not easily resolved. assets of Chinese enterprises averaged only 300 Since November 2020, Tsinghua Unigroup has million yuan in 2019, and the largest total assets been unable to redeem six bonds(29), each time de- owned by a wholly state-owned enterprise were ferring the redemption date(30). The reason why 3.3 billion yuan. Therefore, only central state- creditors did not take bankruptcy procedures im- owned enterprises would meet the conditions for mediately is that Tsinghua Unigroup is a state- this solicitation. owned enterprise funded by prestigious Tsinghua However, central state-owned enterprises are University and plays a part in the semiconduc- the most likely to be influenced by the govern- tor industry, which is the most important area of ment in term of personnel and business manage- China’s industrial policy. There is no doubt that ment, while being able to secure profits through expectations for implicit government guarantees monopolies and oligopolies. Although there is a existed before default. way to bring in outside experts, it is questionable Expectations for implicit government guaran- whether the involvement of central state-owned tees also exist after default. Tsinghua Unigroup enterprises will facilitate rehabilitation. Although continued to engage in so-called “ 短 貸 長 投 ” it is possible to make it look like Tsinghua Uni- portfolio management, by conducting a series of group’s management has regained soundness high-risk mergers and acquisitions while increas- through the capital strength of central state-owned ing short-term borrowings. As of June 2021, total enterprises, it is highly uncertain whether it will liabilities stood at 202.9 billion yuan, up 44 times be able to achieve its original rehabilitation goal from the end of 2012(31). The bankruptcy proceed- of driving China’s semiconductor industry. ings were settled in July 2021, eight months after In China, there are many schemes to give pref- the initial default, even though the total debt was erential treatment to state-owned enterprises. To high and it was clear that postponing the maturity see if default leads to the liquidation of a zombie would not solve the problem. This suggests that company, we also need to look at what happens there had been moves within the government to after default and bankruptcy proceedings. Few- avoid bankruptcy proceedings, and that adjust- er than 20% of defaulting companies went into ments had taken time. bankruptcy proceedings, and 60% of them left The case of Tsinghua Unigroup also shows that outstanding debt unsettled (Xin [2021]). Because there were strong expectations for implicit govern- default does not mean immediate termination of ment guarantees even after the start of bankruptcy bank transactions, defaulting companies can con- proceedings. China’s bankruptcy proceedings in- tinue to operate as they did before default(35). clude 1) “ 清 算 ,” which is equivalent to Japan’s Because default in China does not have the bankruptcy, and in which pro-rata payments are weight as in developed countries, default is not made to creditors in proportion to the amount of an “exit” from the problem of excessive corporate their claims; 2) “重整,” in which the creditors seek debt, but only an “entry point” into the long pro- rehabilitation in accordance with a plan approved cess of resolution. Even if the number of defaults by the court; and 3) “和議,” which is equivalent to on corporate bonds increases and implicit govern- settlement(32). In July 2021, it was decided that Ts- ment guarantees are reviewed, it does not neces- inghua Unigroup would adopt “ 重 整 ,” instead of sarily mean that the liquidation of zombie compa- “清算.”(33) nies is progressing and the problem of excessive For the rehabilitation of Tsinghua Unigroup, debt is being resolved. To see China’s growth tra- 10 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82
jectory, we need to look at the problem of exces- of June 2021, six times more than the 29 trillion
sive debt, instead of defaults or implicit govern- yuan balance of corporate bond issuance (Fig. 9).
ment guarantees. Fig. 10 shows that China’s outstanding total
social financing increased rapidly in response to
the COVID-19 pandemic. The balance, which
(2) The problem of excess debt is was 254.8% of GDP at the end of 2019 before the
moving into uncharted territory outbreak, rose 26.2% points to 281.0% at the end
of September 2020. This is the first significant in-
crease since 2009, when a large-scale economic
In China, indirect financing, in which funds are stimulus package was launched following the col-
borrowed from banks, has become the mainstream lapse of Lehman Brothers, except in 2016, when
of financing rather than direct financing, in which the statistics were revised(36).
funds are raised directly from investors through However, since Fig. 9 and 10 both include
the issuance of corporate bonds. It is bank lend- household debt, it is not clear how much corporate
ing that is important in determining whether the debt has increased. Looking at the BIS statistics,
problem of excessive debt is being resolved. The which show the outstanding amount of debt by
volume of outstanding total social financing pub- borrowers such as non-financial corporations, gov-
lished by the People’s Bank of China shows how ernments, and households, it is clear that it was
much money was supplied to the real economy companies that increased debt (Fig. 11). Both do-
by financing methods such as bank loans, corpo- mestic and foreign media, including that of Japan,
rate bonds, and shadow banking. The balance of are paying attention to whether the government
bank loans stood at 187 trillion yuan as of the end will review its implicit government guarantees in
Fig. 9 B
alance of Total Social Fig. 10 Comparison of Increase
Financing and Percentage of in Balance of Total Social
GDP Financing (Year-end vs.
(Trillion yuan) (%)
Beginning of Year)
(% points)
350 300
30 27.9
300 280 26.2
25
250 260
20
200 240
15
150 220
10 20.6
100 200 15.4
5
50 180
0
0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2015 2016 2017 2018 2019 2020 2021 -5
(Y/Q) COVID-19 pandemic Collapse of Lehman Brothers
Yuan-denominated and foreign-currency-denominated bank loans (left scale) （2019.4Q-2020.3Q） （2008.4Q-2009.4Q）
Shadow banking (left scale) Corporate bonds (left scale) Yuan-denominated and foreign-currency-denominated bank loans
New shares issued by non-financial corporations (left scale) Others (left scale) Shadow banking Corporate bonds
Total social financing as a percentage of GDP (right scale) New shares issued by non-financial corporations
Others Balance of total social financing
Notes: “Shadow banking” includes entrusted loans, trust
loans, and banker’s acceptance. “Others” include Notes: Government bonds and municipal bonds are not in-
government bonds and municipal bonds. The per- cluded in the balance of total social financing at the
centage of GDP is calculated independently. time of the collapse of Lehman Brothers.
Source: Prepared by The Japan Research Institute, Lim- Source: Prepared by The Japan Research Institute, Lim-
ited based on materials from the People’s Bank of ited based on materials from the People’s Bank of
China (PBC) and the National Bureau of Statistics China (PBC) and the National Bureau of Statistics
(NBS) (NBS)
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 11Fig. 11 C
hanges in Outstanding Debt Fig. 12 Changes in Outstanding
(as a Percentage of GDP) by Corporate Debt (as a
Borrower Percentage of GDP) in
(%) Countries with an Excessive
180 Economic stimulus packages after the
Debt Problem
collapse of Lehman Brothers (%)
160
180
140 163.2
COVID-19 pandemic 161.9
120 160
147.6
100 139.6
140
80
120
60 114.9
40 100
20
80
0
2008 10 12 14 16 18 20 60
(Y/Q)
Non-financial corporations (enterprises)
Governments Households
1990 95 2000 05 10 15 20
(Y/Q)
Source: Prepared by The Japan Research Institute, Lim-
ited based on materials from BIS Japan Thailand Spain China
Source: Prepared by The Japan Research Institute, Lim-
ited based on materials from BIS
the face of an increase in corporate defaults, but “urgent action is needed to address the problem of
they are overlooking the fact that the problem of excessive debt” (IMF [2020]). Xi Jinping’s state-
excessive debt has never been more serious. ment that it is necessary to prepare for the “gray
The problem of excessive corporate debt has en- rhinos” is not a threat at all.
tered uncharted territory. According to BIS statis-
tics, which enable international comparisons, the
outstanding debt of Chinese companies as a per- (3) The problem is the guarantee of
centage of GDP was 163.2% at the end of 2020, bank loans
surpassing that of Japan, Thailand, and Spain at
the time when they were forced to reduce their
debt due to the surging problem of excessive debt If defaults on corporate bonds are at an all-
(Fig. 12). In addition, the ratio, which seemed to time high, banks’ non-performing loans (NPLs)
have peaked at 161.9% at the end of March 2017, should increase in tandem. However, China’s NPL
rose again in the wake of the COVID-19 pandem- ratio stood at 1.75% as of the end of June 2021,
ic, and the debt reduction (deleveraging) efforts by down from 1.96% at the end of September 2020
the Chinese government over the past few years (Fig. 13). In China, loans are classified into five
have been basically wiped out. categories in descending order of borrowers’ abil-
Is it possible to maintain this situation? In ity to repay: 1) normal (正常), 2) special mention
2016, the BIS said “a crisis could occur within (関注), 3) sub-standard (次級), 4) doubtful (可疑),
three years” (BIS [2016]), and the International and 5) loss (損失). Those classified in the bottom
Monetary Fund (IMF) also said “urgent and com- three categories are non-performing loans.
prehensive measures are needed to solve the ever Of these, “sub-standard (次級)” refers to claims
increasing corporate debt problem” (Maliszewski for which a certain amount of loss is incurred even
and others [2016]). Despite these warnings, China if collateral is executed, “doubtful ( 可 疑 )” refers
is facing the same situation once again. The IMF to claims for which a relatively large amount of
said in its report issued at the end of 2020 that loss is incurred even if collateral is executed, and
12 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82Fig. 13 NPL Ratio Fig. 14 NPL Ratio by Bank Type
(%) (%)
2.5 5.0
4.5
4.0
2.0
3.5
3.0
1.5
2.5
2.0
1.0 1.5
1.0
0.5 0.5
0.0
2010 11 12 13 14 15 16 17 18 19 20 21
0.0 (Y/Q)
2010 11 12 13 14 15 16 17 18 19 20 21
Large commercial banks Joint-stock commercial banks
(Y/Q)
Commercial banks in urban areas Private banks
sub-standard (次級) doubtful (可疑) loss (損失) Commercial banks in rural areas Foreign banks
Source: Prepared by The Japan Research Institute, Lim- Source: Prepared by The Japan Research Institute, Lim-
ited based on CEIC ited based on CEIC
“loss (損失)” refers to claims for which recovery institutions to issue perpetual bonds with no ma-
is literally impossible. Meanwhile, “special men- turity, which will never be redeemed unless the
tion (関注)” refers to loans that fall between “nor- issuers redeem them before maturity(37), and urged
mal (正常)” and non-performing loans and are not them to increase their equity capital. At the same
classified as non-performing loans but have a risk time, China’s first financial institution bankruptcy
of becoming non-performing loans. When “special law was on the agenda at the National People’s
mention ( 関 注 )” are included in non-performing Congress (NPC; equivalent to the Diet) held in
loans, China’s NPL ratio was 4.13% as of the end March 2021(38), as part of its efforts to curb the in-
of June 2021, but it actually declined from 4.61% crease in non-performing loans by adopting both
at the end of September 2020. soft-line and hard-line policies.
Despite the decline in the NPL ratio, the au- The biggest problem with non-performing loans
thorities are concerned about the future of the fi- is the increase in loans to companies that have a
nancial system. At the Boao Forum for Asia held risk of delay in repayment. According to a survey
in April 2021, Xiao Yuanqi, Vice Chairman of the of 4,400 corporate bond issuers conducted by the
China Banking and Insurance Regulatory Com- IMF, firms with high leverage ratios experienced
mission (CBIRC), said, “Banks need to be pre- significant debt increases from the end of 2019 to
pared in advance as pressure from a rebound of the end of September 2020. Specifically, the debt
non-performing loans is growing.” Small and me- of enterprises whose ratio of interest-bearing debt
dium-sized banks with weak business foundations to EBIT, which is calculated by dividing net li-
are the first to face the problem of loan quality. By abilities, or total liabilities minus cash and depos-
type of bank, the NPL ratio of commercial banks its, by earnings before interest and taxes (EBIT),
in urban areas and commercial banks in rural ar- exceeds 15 times or is negative (below zero) is 3.0
eas has been rising significantly (Fig. 14). trillion yuan, accounting for 53.7% of the 5.4 tril-
The IMF said loan quality deteriorated due to lion yuan of debt that increased during the same
the measures introduced in the wake of the CO- period (Fig. 15).
VID-19 pandemic, including a moratorium on When the ratio of interest-bearing debt to EBIT
repayments and increased tolerance for bad loans is over 15 times, it means that net liabilities are 15
(IMF [2021a]). The government allowed financial times or more of EBIT, and that the debt burden is
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 13Fig. 15 B
reakdown of Increase in Debt 3. The source of excess debt is
Based on the Ratio of Interest-
bearing Debt to EBIT (End of state-owned enterprises
2019 – End of September 2020)
(Trillion yuan)
Why can’t the problem of excessive debt be
1.08 resolved? After its mechanisms are scrutinized,
it will be explained that the problem of exces-
sive debt will not be resolved because preferential
Increase in debt
5.42 trillion yuan
treatment is given to government-funded compa-
0.82
2.97
nies in funding.
0.55
(1) Mechanism that causes excessive
debt
Ratio of interest-bearing debt to EBIT
0-5 times 5-10 times 10-15 times
>15 times,Fig. 16 C
hanges in Financial cessive debt and instructed other banks to restrain
Condition Index (FCI) in
Major Countries/Regions their lending (39), new yuan-denominated loans
continued to increase at a pace faster than market
After the collapse of Lehman Brothers COVID-19 pandemic
expectations until June 2021(40).
7
6
Capital-raising: Difficult
5
4
(2) Expectations for resolution of debt
3
problem are low
2
1
0
China’s leverage ratio is so high that the out-
-1
-2
Capital-raising: Easy standing corporate debt as a percentage of GDP
-3 exceeds 160% (see Fig. 11). Management that
2007 09 11 13 15 17 19 21
(Y/Q)
actively uses bank loans and corporate bonds to
U.S. Other developed countries Eurozone expand investment leads to the maximization of
China Other emerging countries profits in an environment where business perfor-
Source: Prepared by The Japan Research Institute, Lim- mance is expected to rise steadily, but when busi-
ited based on IMF [2021a]
ness performance becomes unstable, debt repay-
ment reaches an impasse. An increase in corporate
defaults suggests that Chinese companies are in
tious about excessive monetary easing because the this situation, and credit risk is unlikely to de-
number of COVID-19 cases was relatively small crease.
and it had been implementing deleveraging since The outstanding volume of social financing as
2017. a percentage of GDP has been gradually decreas-
Nevertheless, the sharp increase in corpo- ing since the latter half of 2020 (see Fig. 9), and
rate debt caused by the expansion of bank loans deleveraging may be accelerated by the regulation
in 2020 shows that the problem of the Chinese on the total amount of real estate-related loans
economy has not been resolved, that is, if the cen- and the “three red lines” that encourages real es-
tral government relaxes its reins on local govern- tate development companies to reduce their debts,
ments, companies, and financial institutions in the to be described later. It is the scenario envisioned
face of unavoidable slowdown in growth, such as by the Xi Jinping administration that the problem
the spread of COVID-19 infections, the amount of excessive debt will be resolved by curbing the
of funds supplied to the real economy will surge. supply of funds to companies, and thereby put-
Unlike the situation after the collapse of Lehman ting the Chinese economy back to a stable growth
Brothers, corporate debt increased in an environ- path.
ment where it was not easy to raise funds, show- However, it is unlikely that the problem of ex-
ing how deep-rooted this problem is. cessive debt will be resolved in accordance with
The People’s Bank of China is positioned as this scenario. A decline in the outstanding vol-
one of the government agencies under the State ume of social financing as a percentage of GDP
Council (Cabinet) just like the Ministry of Com- and regulation of the total amount of loans to real
merce, so it cannot be said that the bank is highly estate developers are among the necessary condi-
independent, and its monetary policy tends to be tions to resolve the problem of excessive debt, but
subordinate to other policies such as industrial they are not sufficient conditions. As shown in
policy and employment policy. This problem is Fig. 15 above, in China, companies that are unable
more likely to surface as concerns about slowing to repay their debts are most eager to raise funds,
growth increase. In fact, although the People’s and the market had responded to such needs posi-
Bank of China warned against the problem of ex- tively. As a result, even if the outstanding vol-
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 15ume of social financing as a percentage of GDP national rating agencies have an average ratio of
decreases and deleveraging progresses, debt will interest-bearing debt to EBIT of six times (IMF
not decrease as expected because debt is unevenly [2020a]). In light of this, the Chinese corporate
distributed to companies with low repayment ca- bond market is a mixed bag as companies with
pacity and additional lending is required. low debt repayment capacity are included as play-
In fact, using the IMF data presented in Fig. 15, ers. Although the government issued the Admin-
if we look at the ratio of interest-bearing debt istrative Measures for the Issuance and Trading
to EBIT of bond issuers and their credit spread, of Corporate Bonds at the end of 2020 and es-
which is the difference in interest rate between tablished basic requirements and legal respon-
corporate bonds and government bonds, based on sibilities for information disclosure, such as the
the balance of corporate bonds issued as of the requirements, content, timing, and frequency of
end of September 2020, we can see that there is no information disclosure, the mixed-bag situation
correlation between the two. In other words, even will not likely change unless implicit government
if a company’s debt repayment capacity is high, guarantees are eliminated.
it is not necessarily possible to raise funds at low
interest rates. Assuming that if the credit spread is
200 basis points or less, a company has financed (3) Prominent preferential treatment
at low interest rates, 70% of companies with a ra- for government-funded companies
tio of interest-bearing debt to EBIT of more than
15 times or even below zero are included in this
category, and the ratio is not much different from Amid growing concerns about the elimination
companies with a ratio of interest-bearing debt to of implicit government guarantees, the structure in
EBIT of five times or less (Fig. 17). which funds are concentrated on companies with
Companies rated as “CCC” (triple C) by inter- low debt repayment capacity has not changed, as
can be seen from data from 2016 to the January-
March 2021 period for about 4,200 companies ex-
cluding financial institutions listed on the Shang-
Fig. 17 B
reakdown of Corporate hai and Shenzhen stock exchanges. If both com-
Bonds Based on the Ratio of
Interest-bearing Debt to EBIT panies and financial institutions are serious about
by Credit Spread (Balance as debt reduction, the net liabilities of companies
of the End of September 2020) with high ratios of interest-bearing debt to EBIT
(%)
should decrease, the problem of excessive debt
100
should improve, and credit risk should be mitigat-
90
80
ed.
70
However, there is no such tendency. Looking
60 at changes in net liabilities of enterprises with in-
50 creased net liabilities in accordance with the aver-
40 age ratio of interest-bearing debt to EBIT of the
30
last quarter, net liabilities increased for companies
20
whose ratio of interest-bearing debt to EBIT ex-
10
0
ceeded 15 times or was negative in the January-
0–5times 5–10times 10–15times >15times,Fig. 18 Breakdown of Net Liabilities Based on the Ratio of
Interest-bearing Debt to EBIT
(Trillion yuan) (%)
12 100
10 95
8 90
6 85
4 80
2 75
0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2016 2017 2018 2019 2020 2021
(Y/Q)
> 15 times, < 0 times 10-15 times 5-10 times 0-5 times(left scale)
Ratio of “> 15 times, < 0 times” (right scale)
Notes: The ratio of interest-bearing debt to EBIT is based on the weighted average of the past four
quarters. Companies with negative net liabilities are excluded.
ment for state-owned enterprises. When extracting bearing debt to EBIT exceeds 15 times. In other
the companies with a ratio of interest-bearing debt words, it indicates that they are protected by im-
to EBIT exceeding 15 times from Fig. 18, net li- plicit government guarantees, and that so-called
abilities for January-March 2021 period (6,647.9 “additional lending” is being actively conducted.
billion yuan) can be broken down by the govern- The ease of funding for a company does not de-
ment ownership ratio as follows: 1) 1,315.6 bil- pend on the government ownership ratio, but on
lion yuan, 3.2% of the total, for companies with whether it is funded by the government or not. As
a government ownership ratio of 80% or more; 2) a result, debt of government-funded companies
772.2 billion yuan, or 11.6% of the total, for com- always accounts for more than 80% of net liabili-
panies with a government ownership ratio of 60% ties, as shown by the line graph of Fig. 19.
or more and less than 80%; 3) 285.9 billion yuan, Implicit government guarantees can be said to
or 4.3% of total, for companies with a government be the biggest cause of “Guo jin min tui,” in which
ownership ratio of 40% or more and less than state-owned enterprises advance while private en-
60%; 4) 529.5 billion yuan, or 8.0% of total, for terprises are gradually forced to retreat. According
companies with a government ownership ratio of to the statistics of enterprises in the mining and
20% or more and less than 40%; 5) 2,696.8 billion manufacturing industries, for which detailed data
yuan, or 40.6% of total, for companies with a gov- by ownership type can be obtained, state-owned
ernment ownership ratio of more than 0% and less enterprises accounted for only 26.4% of total
than 20%; and 6) 1,047.8 billion yuan, or 15.8% sales as of the end of 2020, but they accounted for
of total, for companies with a government owner- 39.9% of debt(41). This also shows that state-owned
ship ratio of 0% (Fig. 19). enterprises are in a more favorable environment
At first glance, it appears that there is no cor- than private enterprises in terms of financing. The
relation between the government ownership ratio problem of excessive debt is a result of “Guo jin
and the debtor’s ability to repay. However, be- min tui,” and it can be said that it is difficult to
cause the government ownership ratio is 0% for solve the problem under the Xi Jinping adminis-
63.9% of listed companies, Fig. 19 shows that tration, which emphasizes state-owned enterpris-
companies funded by the government have no dif- es.
ficulty raising funds even if their ratio of interest-
RIM Pacific Business and Industries Vol. XXI, 2021 No. 82 17Fig. 19 Net Liabilities of companies with the Ratio of Interest-
bearing Debt to EBIT Exceeding 15 Times (Breakdown by
Government Ownership Ratio)
(Trillion yuan) (%)
8 87
7 86
6
85
5
84
4
83
3
82
2
1 81
0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2016 2017 2018 2019 2020 2021
(Y/Q)
＞＝80％ ＞＝60％,＜80％ ＞＝40％,＜60％ ＞＝20％,＜40％ ＞0％,＜20％
0％ Ratio of debt of government-funded companies (right scale)
Notes: Data for 2021 covers the period through June 2021. Government-funded companies mean com-
panies with government ownership ratio above zero (> 0).
Source: Prepared by The Japan Research Institute, Limited based on materials from Bloomberg
4. Overheating of the real estate real estate development industry, and according to
market the China Statistical Yearbook 2020 published by
the National Bureau of Statistics of China, they
accounted for only 0.7% of total number of en-
Real estate developers, such as Evergrande terprises and 0.9% of total number of workers in
Group, are growing increasingly prominent in the 2019.
corporate debt problem. After analyzing the char- Since there are three to four state-owned enter-
acteristics of China’s real estate market, how the prises in the top 10 in terms of sales amount and
government is taking measures against the over- sales area in 2020, most of small and medium-
heating of the real estate market and its results sized developers are private enterprises. As real
will be examined. estate development, like IT, was a new business
for state-owned enterprises, the entry of state-
owned enterprises was delayed and the market
(1) Real estate development is led by was formed with private enterprises as the main
private enterprises players. The only two state-owned enterprises spe-
cialized exclusively in real estate development are
Vanke(42), whose dominant shareholder is Shen-
Real estate development in China is being pro- zhen Metro Group, and Poly Developments and
moted mainly by private enterprises. For this rea- Holdings Group, which is a central state-owned
son, the structure, which has been pointed out, that enterprise (Table 1).
the problem of excessive debt cannot be resolved Private enterprises are not subject to implicit
due to the existence of state-owned enterprises government guarantees, but the government can-
whose liquidation has not progressed despite the not afford to sit back and watch the default or
favorable financing environment does not apply to bankruptcy of major real estate developers simply
the real estate development industry. State-owned because they are not state-owned enterprises.
enterprises do not have a strong presence in the First, the excessive debt problem is serious
18 RIM Pacific Business and Industries Vol. XXI, 2021 No. 82Table1 T
op 10 Chinese Real Estate Developers in Terms of Sales Amount and Sales
Area (2020)
Sales amount Sales area
Rank Company name Type Rank Company name Type
(100 million yuan) (10,000 m2)
1 Country Garden Private 7,888 1 Country Garden Private 8,421
2 Evergrande Group Private 7,038 2 Evergrande Group Private 7,834
3 Vanke State-owned 7,011 3 Vanke State-owned 4,328
4 Sunac China Holdings Private 5,750 4 Sunac China Holdings Private 4,148
Poly Developments and Poly Developments and
5 State-owned 5,028 5 State-owned 3,405
Holdings Group Holdings Group
6 China Overseas Estate State-owned 3,603 6 Greenland Holdings Mixed 2,800
7 Greenland Holdings Mixed 3,567 7 Seazen Holdings Private 2,353
8 Shimao Group Holdings Private 3,003 8 Jinke Property Group Private 2,230
9 China Resources Land State-owned 2,900 9 China Overseas Estate State-owned 1,925
10 Greentown China Holdings Private 2,892 10 Shimao Group Holdings Private 1,713
Notes: Companies included in “Hurun China 500 Most Valuable Private Companies 2020” (Hurun Report) are categorized as “private
companies.”
Source: Prepared by The Japan Research Institute, Limited based on local media reports
in the real estate development industry. The to- development industry is one of the leading indus-
tal debt of the real estate development industry tries in China’s economy since it accounted for
reached 67.4 trillion yuan in 2018, exceeding that 5.6% of GDP in 2000. About half of Evergrande
of the mining and manufacturing industries of Group’s total debt of 1,966.5 billion yuan, or
65.4 trillion yuan (Fig. 20 Left). The debt of the 951.1 billion yuan, is said to be accounts payable
real estate development industry tends to increase to construction companies(43), which indicates that
due to the nature of its business. However, given the real estate development industry has a large
the fact that the total debt of the real estate devel- ripple effect on other industries. If the construc-
opment industry is larger than that of the mining tion industry, which has close ties with the real es-
and manufacturing industries even though the real tate development industry, is included, the real es-
estate development industry’s share of GDP repre- tate development industry accounts for 14.3% of
sents only one-fifth of that of the mining and man- GDP and is second only to the mining and manu-
ufacturing industries, it is obvious that the real es- facturing industries at 30.3%.
tate development industry has adopted significant Third, since real estate-related loans account for
leveraging in its business. a large proportion of bank loans, the turmoil in the
Moreover, the debt-to-asset ratio in the real real estate market could affect the stability of the
estate development industry rose by 8.1% over financial system. Real estate-related loans can be
10 years, in contrast to that in the mining and divided into development loans for companies and
manufacturing industries (Fig. 20 Right). While housing loans for households. Their share of out-
debt servicing capacity varies from company to standing loans, which was less than 15% in 2005,
company, credit uncertainty could spread to other rose to nearly 30% in 2019 as mortgage lending
industry giants if Evergrande Group defaults on expanded (Fig. 21). Given that real estate devel-
multiple bonds and ends up with “清算,” in which opment acounts for 5.6% of GDP, bank’s depen-
pro-rata payments are made to creditors in propor- dence on real estate is serious.
tion to the amount of their claims. Fourth, housing demand in China is supported
Second, the real estate development industry not by actual demand for housing, but by specula-
accounts for a large proportion of the Chinese tion, or investment aimed at money-making, and
economy. The added value created by the real es- thus is vulnerable to price fluctuations. A survey
tate development industry was 6.5 trillion yuan in of household assets conducted in 2019 by the Peo-
2018, accounting for 7.1% of GDP. The real estate ple’s Bank of China(44) found that 96% of house-
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