{ "title": "Rebalancing China: International Lessons in Corporate Debt", "publication": "IMF News, June 10, 2016", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061016", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061016", "overlayPath": "/en/news/articles/2015/09/28/04/53/sp061016/index.md", "summary": "Speech by David Lipton, First Deputy Managing Director, IMF, delivered at China Economic Society Conference On Sustainable Development in China and the World, June 11, 2016, Shenzhen, China.", "authors": [ "David Lipton" ], "publishDate": "2016-06-10", "sections": [ { "heading": "Introduction", "content": "- Speech by David Lipton, First Deputy Managing Director, IMF, delivered at China Economic Society Conference On Sustainable Development in China and the World, June 11, 2016, Shenzhen, China.\n- Shenzhen is used as a symbol of rapid rise and the changing economic and financial landscape in China.\n- Rebalancing requires timely actions to allow the new to grow and to downsize what is outmoded or overbuilt.\n- Purpose: discuss corporate debt through three themes:\n - IMF view of China’s economic rebalancing effort;\n - scale of the debt issue;\n - strategies for addressing corporate indebtedness drawing on international experience." }, { "heading": "Assessing Rebalancing", "content": "- Growth remains strong by any standard, with the caveat of China’s own last 25 years.\n- External adjustment:\n - Current account surplus down from the peak of 10 percent of GDP in 2007 to around 2-3 percent in recent years.\n - Contribution of net exports fluctuating around zero.\n - Last year’s surge of capital outflows has slowed; effective exchange rate broadly stable.\n - Renminbi included in the Special Drawing Rights basket after IMF determined it is a freely usable currency.\n- Domestic rebalancing:\n - Moderate progress reorienting from investment to consumption.\n - Consumption contributed about two-thirds of growth in 2015.\n - Growth is driven less by heavy industry and exports and more by services and manufacturing for household consumption.\n- Limited progress in addressing corporate indebtedness and restructuring despite SOE reform plans and announced capacity reduction targets in coal and steel.\n- Rapid increase in credit growth in 2015 and early 2016 and continued high rates of investment have expanded the problem." }, { "heading": "China’s Debt Problem — Key Statistics and Facts", "content": "- Overall total debt: about 225 percent of GDP.\n- Government debt: about 40 percent of GDP.\n- Household debt: about 40 percent of GDP.\n- Corporate debt: about 145 percent of GDP.\n- IMF calculation: state-owned enterprises account for about 55 percent of corporate debt while representing 22 percent share of economic output.\n- Many SOEs are far less profitable than private enterprises; declining earnings plus rising indebtedness undermine debt servicing and supplier payments.\n- Banks are holding increasing nonperforming loans (NPLs); recent credit boom extends the problem.\n- IMF Global Financial Stability Report estimate: potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7 percent of GDP (conservative estimate, excludes potential problem exposures in the “shadow banking” sector)." }, { "heading": "Lessons from International Experience — Three Broad Lessons", "content": "- First: act quickly and effectively, or the problem will worsen — company debt problems today can become systemic tomorrow, potentially leading to much lower growth or a banking crisis.\n- Second: deal with both creditors and debtors — addressing only bank balance sheets or only corporate viability is insufficient; fix both sides together.\n- Third: address governance problems in corporate and banking sectors that gave rise to the problem — without governance reform, debt relief is temporary and a new debt bubble can re-inflate." }, { "heading": "Acting Quickly", "content": "- Chinese government recognizes need to address “zombie firms” and “debt overhang” (as cited from an interview in the People’s Daily with an “authoritative person”).\n- Quotation: “NPLs are like ice cream cones. If you don’t get rid of them, they melt all over your hands, and you don’t have anything left to sell.” — head of Huarong Asset Management." }, { "heading": "Deal with Creditors and Debtors — Enhanced Work-Out Framework", "content": "- Effective response often requires an “enhanced framework” led by government but relying on technical expertise for assessment and mediation; business judgment should guide the process, not political favor.\n- Corporate insolvency framework should:\n - facilitate rehabilitation of viable firms and speedy liquidation of nonviable ones on a company-by-company basis;\n - provide an enforcement regime enabling creditors to enforce claims predictably, equitably and transparently;\n - use both carrots and sticks to enforce payment discipline;\n - ensure banks prudently recognize losses and have adequate loss-absorbing capacity.\n- Regional precedent: Indonesia, Korea, Malaysia, and Thailand used such frameworks after the 1997-98 crisis; government support but restructuring largely out of court.\n- Korea example: controlling shareholders of chaebol lost power through court-supervised and out-of-court restructuring; not bankrupted but restricted from extensive borrowing from their own banks." }, { "heading": "Debt-Equity Conversion and Asset Management Companies", "content": "- Debt-equity conversion can deleverage firms and realign banks’ claims if two conditions hold:\n - banks can assert creditor rights and triage viable vs non-viable firms;\n - banks can manage equity or sell it to investors who can.\n- Challenges where banks lack incentives to assert creditor rights due to cross-ownership, conflicts of interest, or political factors; government intervention may be needed.\n- Banks entering restructuring may require recapitalization (as occurred in Indonesia).\n- European insolvency pressures have led to legal reforms and incentivized out-of-court restructuring in countries such as Italy, Spain and Portugal, constrained by competition law.\n- Public asset management companies (AMCs) have been used in many crises, including Eastern Europe and earlier Chinese NPL resolution efforts:\n - An AMC should be a workout house, not a warehouse for bad loans;\n - AMCs should lead to restructuring or sell assets to new owners pressing for restructuring.\n- Challenges for AMCs: asset valuation difficulties, thin markets for asset sales, social and political pressures; strong governance and commercial principles are essential." }, { "heading": "Fix It for Good — Governance Reforms", "content": "- Governance is essential to prevent recurrence: “Those who cannot remember the past are condemned to repeat it.”\n- China previously relieved big banks of legacy SOE NPLs; the same pattern is repeating with SOE indebtedness.\n- Governance must include:\n - robust legal framework for insolvency and enforcement to create payment discipline;\n - regulatory and supervisory policies promoting proper assessment and pricing of risk at individual loan level;\n - robust accounting, loan classification, loan loss provisioning, and disclosure rules;\n - avoidance of moral hazard.\n- Implementation matters: impartial enforcement transcending special interests; commitment to fix system flaws before crises emerge.\n- Strengthening institutions of corporate governance: enhance shareholder rights and prioritize public disclosure.\n- In systems with SOEs, governance requires making companies live within their means and ending government subsidies by enforcing hard budget constraints — cited precedent: Poland and other Central European countries in the 1990s.\n- Distinguish well run from badly run SOEs; debt can fuel well-run business. Critical questions for firms:\n - Are they papering over losses?\n - Building capacity that adds to a global surplus?\n - What is their exposure to shadow banking products?\n- Restructuring must be based on hard facts and independent expert analysis (valuation, restructuring, debt workouts).\n- Social implications:\n - Policies should mitigate impacts on workers and families during restructuring;\n - Government’s 100 billion Renminbi restructuring fund to absorb expected welfare costs for an expected 1.8 million affected workers.\n- Caution on M&A: merging a weak SOE with a stronger one can simply subsidize losses unless the strong SOE has authority to restructure the loss-making company; otherwise letting the company fail may be preferable." }, { "heading": "Conclusion", "content": "- China faces extraordinary challenges: growth is slowing but remains enviable by advanced-economy standards; corporate debt is a serious and growing problem requiring immediate and sustained reforms.\n- IMF and global experience offer expertise from transitions from state-dominated to market-driven economies; the key is political will to avoid repeating mistakes and implement reforms to reinvigorate growth.\n- Confidence expressed that China can adapt and ensure the “new normal” is sustainable development benefiting China and the world.\n\nIMF Communications Department. Media Relations.\n\n---\n\n Content in this bundle\n\n- 061016cpdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- People's Republic of China and the IMF\n- Indonesia and the IMF\n- Republic of Korea and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061016" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/53/sp061016/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/53/sp061016/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/53/sp061016/bundle-manifest.json)", "Authors: David Lipton", "Published: June 10, 2016", "Speech by David Lipton, First Deputy Managing Director, IMF, delivered at China Economic Society Conference On Sustainable Development in China and the World, June 11, 2016, Shenzhen, China.", "Shenzhen is used as a symbol of rapid rise and the changing economic and financial landscape in China.", "Rebalancing requires timely actions to allow the new to grow and to downsize what is outmoded or overbuilt.", "Purpose: discuss corporate debt through three themes:", "Growth remains strong by any standard, with the caveat of China’s own last 25 years.", "External adjustment:", "Domestic rebalancing:", "Limited progress in addressing corporate indebtedness and restructuring despite SOE reform plans and announced capacity reduction targets in coal and steel.", "Rapid increase in credit growth in 2015 and early 2016 and continued high rates of investment have expanded the problem.", "Overall total debt: about 225 percent of GDP.", "Government debt: about 40 percent of GDP.", "Household debt: about 40 percent of GDP.", "Corporate debt: about 145 percent of GDP.", "IMF calculation: state-owned enterprises account for about 55 percent of corporate debt while representing 22 percent share of economic output.", "Many SOEs are far less profitable than private enterprises; declining earnings plus rising indebtedness undermine debt servicing and supplier payments.", "Banks are holding increasing nonperforming loans (NPLs); recent credit boom extends the problem.", "IMF Global Financial Stability Report estimate: potential losses for Chinese banks’ corporate loan portfolios could be equal to about 7 percent of GDP (conservative estimate, excludes potential problem exposures in the “shadow banking” sector).", "First: act quickly and effectively, or the problem will worsen — company debt problems today can become systemic tomorrow, potentially leading to much lower growth or a banking crisis.", "Second: deal with both creditors and debtors — addressing only bank balance sheets or only corporate viability is insufficient; fix both sides together.", "Third: address governance problems in corporate and banking sectors that gave rise to the problem — without governance reform, debt relief is temporary and a new debt bubble can re-inflate.", "Chinese government recognizes need to address “zombie firms” and “debt overhang” (as cited from an interview in the People’s Daily with an “authoritative person”).", "Quotation: “NPLs are like ice cream cones. If you don’t get rid of them, they melt all over your hands, and you don’t have anything left to sell.” — head of Huarong Asset Management.", "Effective response often requires an “enhanced framework” led by government but relying on technical expertise for assessment and mediation; business judgment should guide the process, not political favor.", "Corporate insolvency framework should:", "Regional precedent: Indonesia, Korea, Malaysia, and Thailand used such frameworks after the 1997-98 crisis; government support but restructuring largely out of court.", "Korea example: controlling shareholders of chaebol lost power through court-supervised and out-of-court restructuring; not bankrupted but restricted from extensive borrowing from their own banks.", "Debt-equity conversion can deleverage firms and realign banks’ claims if two conditions hold:", "Challenges where banks lack incentives to assert creditor rights due to cross-ownership, conflicts of interest, or political factors; government intervention may be needed.", "Banks entering restructuring may require recapitalization (as occurred in Indonesia).", "European insolvency pressures have led to legal reforms and incentivized out-of-court restructuring in countries such as Italy, Spain and Portugal, constrained by competition law.", "Public asset management companies (AMCs) have been used in many crises, including Eastern Europe and earlier Chinese NPL resolution efforts:", "Challenges for AMCs: asset valuation difficulties, thin markets for asset sales, social and political pressures; strong governance and commercial principles are essential.", "Governance is essential to prevent recurrence: “Those who cannot remember the past are condemned to repeat it.”", "China previously relieved big banks of legacy SOE NPLs; the same pattern is repeating with SOE indebtedness.", "Governance must include:", "Implementation matters: impartial enforcement transcending special interests; commitment to fix system flaws before crises emerge.", "Strengthening institutions of corporate governance: enhance shareholder rights and prioritize public disclosure.", "In systems with SOEs, governance requires making companies live within their means and ending government subsidies by enforcing hard budget constraints — cited precedent: Poland and other Central European countries in the 1990s.", "Distinguish well run from badly run SOEs; debt can fuel well-run business. Critical questions for firms:", "Restructuring must be based on hard facts and independent expert analysis (valuation, restructuring, debt workouts).", "Social implications:", "Caution on M&A: merging a weak SOE with a stronger one can simply subsidize losses unless the strong SOE has authority to restructure the loss-making company; otherwise letting the company fail may be preferable.", "China faces extraordinary challenges: growth is slowing but remains enviable by advanced-economy standards; corporate debt is a serious and growing problem requiring immediate and sustained reforms.", "IMF and global experience offer expertise from transitions from state-dominated to market-driven economies; the key is political will to avoid repeating mistakes and implement reforms to reinvigorate growth.", "Confidence expressed that China can adapt and ensure the “new normal” is sustainable development benefiting China and the world.", "[061016cpdf (PDF)](/-/media/websites/imf/imported/external/chinese/np/speeches/2016/061016cpdf.pdf){rel=\"external\" type=\"application/pdf\"}", "[People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)", "[Indonesia and the IMF](http://www.imf.org/external/country/IDN/index.htm)", "[Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)", "[Speeches](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "related": [ { "title": "061016cpdf", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported/external/chinese/np/speeches/2016/061016cpdf.pdf", "binary": { "path": "/-/media/websites/imf/imported/external/chinese/np/speeches/2016/061016cpdf.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/53/sp061016/index.md", "json": "/en/news/articles/2015/09/28/04/53/sp061016/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/53/sp061016/bundle-manifest.json" }, "generatedAtUtc": "2026-09-27T10:05:45.431Z" }