State-Owned Enterprises Leverage as a Contingency in Public Debt Sustainability Analysis: The Case of the People's Republic of China

25 Pages Posted: 7 Jun 2018

See all articles by Benno Ferrarini

Benno Ferrarini

Asian Development Bank

Marthe Hinojales

Asian Development Bank

Date Written: January 2018

Abstract

We reflect state-owned enterprises’ (SOE) leverage within the standard debt sustainability assessment framework. Based on company data and the interest coverage ratio as a measure of debt at risk, aggregate baseline projections and fan charts gauge SOE debt as a contingent liability to the public sector. We find that SOE leverage in the People’s Republic of China has grown to a large liability that deserves the urgent attention it has been receiving from the authorities. While there is no room for complacency, there is no need for panic either; even if authorities had to step into mop up as much as 20% of SOE debt at risk gone bad, this would appear to be manageable at roughly 2.7% of the gross domestic product in 2016 or 5.5% by 2021. These findings are reflective of discretionary assumptions about future developments in the SOE sector and the broader economy—including baseline conditions premised on preventive government action to slow borrowing—that are adjustable to reflect analysts’ prerogatives and expectations.

Keywords: contingent liabilities, corporate leverage, People’s Republic of China, public debt sustainability, state-owned enterprises

JEL Classification: G01, G21, H30, H60

Suggested Citation

Ferrarini, Benno and Hinojales, Marthe, State-Owned Enterprises Leverage as a Contingency in Public Debt Sustainability Analysis: The Case of the People's Republic of China (January 2018). ADBI Working Paper 534, Available at SSRN: https://ssrn.com/abstract=3187981 or http://dx.doi.org/10.2139/ssrn.3187981

Benno Ferrarini (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Marthe Hinojales

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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