Clear line between state and market is key to China deleveraging: People's Daily

October 12, 2016 11:24 AM

The key to successful deleveraging of corporate debt is a clear line between the government and the marketplace, a commentary in the People's Daily, the official newspaper of the ruling Chinese Communist Party, said Wednesday.

In the process of reducing debt risks, the state cannot take a paternalistic stance and usurp the market's role, the paper said, as global concerns grow over whether China's government will be able to avoid a debt crisis.

Corporate China sits on $18 trillion in debt, equivalent to about 169% of gross domestic product (GDP). 

Dongbei Special Steel Group Co., Ltd's recent entry into a bankruptcy restructuring process is a clear example of how legal and market principles can be applied following debt repayment problems, the commentary said.

The company has been at the heart of troubles in China's debt market this year, defaulting on nine separate bonds even as Beijing has vowed to close "zombie" firms with perennial losses and too much debt.

China's formal bankruptcy process remains largely untested, but the recent case of Guangxi Nonferrous Metals Group Co Ltd may set a precedent for the formal liquidation of a company following entrance into bankruptcy court.

The People's Daily commentary followed long-awaited guidelines released Monday by the State Council, China's cabinet, on plans to reduce corporate leverage.

The government will take a multi-pronged approach to cutting company debt, including encouraging mergers and acquisitions, bankruptcies, debt-to-equity swaps and debt securitization, the State Council said.

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