Why the leverage ratio of state-owned enterprises is high

In May 11th, the second meeting of the Central Committee for comprehensive deepening of the reform and reform committee examined and passed the guidance on strengthening the assets and liabilities of state-owned enterprises, and put forward requirements for the deleveraging of state-owned enterprises. This is the second time in a month that the Central Committee has made arrangements for reducing debt and deleveraging of state-owned enterprises. In April 2nd of this year, structural deleveraging was first mentioned at the first meeting after the establishment of the Central Economic Committee. It was clear that state-owned enterprises were one of the main bodies to speed up leveraging, and we should strive to achieve a stable and gradual decline in macro leverage.
In recent years, deleveraging and debt reduction are important tasks in the operation of state-owned enterprises. Data from the SASAC showed that the average asset liability rate of central enterprises was 66.3% at the end of 2017, 0.4 percentage points down from the same period, and the asset liability ratio of Industrial Enterprises above the same period was 55.5%. According to the data published by the Ministry of finance, as of the end of the first quarter of this year, the total assets of the state-owned enterprises were 164 trillion and 76 billion 780 million yuan, up 9.6% from the same period, and the total liabilities were 1065725 billion yuan, up 8.7% from the same period, and the latest state-owned enterprise debt ratio was 65%, still in high position. In this round of deleveraging, the leverage ratio of state-owned enterprises and non state enterprises continues to differentiate.
Why is the leverage ratio of state-owned enterprises higher than that of non state enterprises, and the speed of deleveraging is relatively slow? The author believes that this is the result of the following factors.
First of all, City Investment Corporation has undertaken part of the government financing function, but the debt borrowed by these enterprises has been incorporated into the debt of state-owned enterprises. As a complement to the tax sharing system, the old budget law, which began in 1995, restricts the direct borrowing of local governments. Under the pressure of financial expenditure, local governments began to form city investment companies, financing and investing in the infrastructure and public services through city investment companies.
In October 2014, the State Council issued a “opinion on strengthening the management of local government debt”, which requires the divestiture of the government financing function of the city investment company and the demarcation of the boundary between the city investment debt and the local government debt.  However, in practice, some local governments are difficult to get rid of the “dependence” of the city investment companies, typical cases such as the local government reported by the Ministry of Finance in 2017 through urban investment violations.
Theoretically, some public goods should be provided by finance, and city investment companies undertake some government financing functions. However, when calculating the leverage ratio of various departments, the debt of the special type of state-owned enterprises of the city investment company is also included in the debt of state-owned enterprises. In the various types of debt of the City Investment Corporation, the stock of the city voted only at the end of 2017 was as high as 7 trillion and 100 billion yuan. If bank loans and trust financing are taken into account, the size of the debt of the city investment company is much larger.
Secondly, the soft budget constraint of state-owned enterprises is more likely to cause debt accumulation. The reform of state-owned enterprises has lasted for many years, and the modern enterprise system has been gradually established, but on the whole, the market level of the state-owned enterprises is lower than that of the private enterprises, which has obvious characteristics of the soft constraints of the budget.  The soft constraints of the budget are highlighted in the following points: first, the management decision is easily subject to policy intervention, especially when the economic downside pressure is large and the steady growth becomes the center of policy, such as a large number of new steel and coal projects during the 4 trillion yuan investment plan. Second, it is insensitive to the change of capital cost. In the second quarter of 2017, when the interest rate of the bond issue rises, the proportion of the private enterprises to cancel the bond issue is much higher than that of the state-owned enterprises. Third, some state-owned enterprises have low operating efficiency, resulting in relatively less profit after borrowing debt investment projects, which means that the rate of debt repayment will be slower than the average.
Thirdly, from the industrial chain, the capital demand of the upstream and middle reaches of the industry is higher than the downstream industry, and the state-owned enterprises are higher in these heavy capital industries, which also leads to the high debt of the state-owned enterprises. Such industries as iron and steel, cement, coal, and chemical industry are most of the state-owned enterprises. These enterprises have a large investment in the early stage, and a large amount of cash is needed in the process of production and operation. These industries have higher debt, and thus the overall leverage ratio of state-owned enterprises has been promoted.
Finally, in various types of debt financing, creditors are more interested in state-owned enterprises than private enterprises, and also create an environment for the high leverage ratio of state-owned enterprises.
Corporate debt financing instruments include bank loans, bonds, trusts, entrusted loans and financing leases. When state-owned enterprises raise funds through these means, creditors of financial institutions and other creditors have the anticipation of local governments. For private enterprises, they should be cautious and take careful consideration from the aspects of enterprise qualification and their industries.
Because of the expected existence of local governments, state-owned enterprises are more likely to obtain external debt financing. In addition, the soft constraints of the state-owned enterprise budget mentioned earlier, and a part of the government investment and financing functions, so when the economy is facing greater pressure of steady growth, the leverage rate of state-owned enterprises will soar, such as from 2008 to 2011 and 2014 to 2016.

Send your message to us:

  • * CAPTCHA: Please select the Star

Post time: Jun-13-2018
  • * CAPTCHA: Please select the Key