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  1. International Finance, Wiley Blackwell | IDEAS/RePEc
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Mid-Cap Value. Small Cap Value. Small Cap Diversified Value. Global Value. International Value.

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Value Opportunities. Capital Income. High Yield. Diversified Value. Why is corporate debt so massive? A look at the composition of Chinese corporate debt provides a first explanation. Zhou Xiaochuan , a Chinese governor of the central bank of China from to and deemed liberal reformist, sheds some light on the situation:. Such borrowing was included in the statistics of corporate debt.

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Thus, the debt of the corporate sector has been overestimated. Local government debt. As such, understanding how Chinese corporations accumulated so much debt across the board requires understanding how growth occurs at the local level. Regional governments in China are forced to borrow heavily every year: despite being responsible for most public missions funding schools, hospital, transports, etc. The tax system is heavily skewed towards the central government, and regional government get very little from taxes levied in their territory Aglietta and Bai, The gap between necessary expenses and available revenue is filled by borrowing.

This functioning is, of course, detrimental to the interests of the Chinese population, as local governments have to struggle to find the funds needed to finance basic public services. What are the tools available for local governments to borrow? These shell companies are controlled by local officials and borrow heavily from the central banks or other companies.

It is important to understand the process of local indebtedness. In China, local governments de facto have the monopoly over the supply of land. Land sales, taxes included, account for half of their budget. This revenue is used to secure even more loans, and these loans are in turn used to finance the construction of highways, railways, electricity grids and other infrastructure projects. This process of regional indebtedness is almost completely opaque, and favors both speculation and corruption. Shady transactions and investments became so widespread that the central authorities felt they had lost control.

This is why Beijing recently introduced policies to increase transparency in regional administrations. Local governments are now relying more and more on municipal bonds to borrow Goldman Sachs, This nonfinancial corporate debt has increased significantly over the past decade. To say that corporate debt is excessive is an understatement. Overall, SOEs accounted for more than half of total corporate debt, i. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in , the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments. As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. The other member countries are divided into groups led by one country.

They were also responsible for most of the increase in corporate debt over the period.

Moreover, many of these SOEs did not manage to adapt to the introduction of market mechanisms. They were unable to make profits, to invest in research and development, to create new products, and therefore became progressively obsolete. They are nonetheless major sources of employment and remain crucial to regional economies, which is why local governments have kept them on life-support Lau, The term has even gained quasi-official recognition, as politicians and public institutions now employ it.

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Dongbei Special Steel is one example Xin, This giant company, based in the North-East rust-belt province of Liaoning, defaulted no less than ten times since and has accrued liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company equity provided by the partners, provisions for risks and charges, debts.

According to neoclassical economists, these companies should be eliminated because they make no profits.

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A distinction is made between real guarantees lien, pledge, mortgage, prior charge and personal guarantees surety, aval, letter of intent, independent guarantee. This supposedly leads them to a high leverage and a weak debt-service capacity. Of course, as these companies are public, one can wonder why profitability and debt-servicing should be at the core of their preoccupations. In reality, these enterprises were not created and equipped to make profits in a capitalist economy.

And they are vital sources of employment in rust-belt regions of China, creating livelihood for many. That is not to say that these companies are blameless. Other products are obsolete. Many of these companies should indeed be left to die in peace. But workers must be offered state support and decent alternatives to their current jobs. The massive injection of credit was effective in the short term. Despite being directly hit by a global slump in exports, China was one of the least affected countries of the last global crash and swiftly recovered, returning to a double-digit growth.

This problem only grew in the years that followed. Worse, not all of this cheaply-obtained credit was channeled into financing investment. Part of it was often re-lent by SOEs and LGFVs at higher rates, fueling speculation and an increase in non-performing loans across the entire banking system - Handley, -. The reason why this massive indebtedness did not turn immediately into a serious issue is the fact that SOEs also made a lot of corporate deposits, resulting in a significantly lower level of net corporate debt than the headline gross corporate debt figure. However, in the most recent years weaker corporate earnings have led to smaller corporate deposits, and thus net corporate debt has been on the rise.

Private sector debt. Meanwhile, purely private firms represent one third of all corporate debt. The private sector in China is very dynamic. It is mainly composed of small and medium-sized enterprises SMEs , which serve as the engine of growth in both developed and developing countries World Bank, SMEs compose the vast majority of Chinese private enterprises and also contribute to debt. As for public company debt, private sector debt is derived from bank loans, bond Bond A bond is a stake in a debt issued by a company or governmental body.

The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal.