Cleaning or dealing with the bad debts of zombie companies may be the only way to solve China's over-leverage problem, an economist writes in a commentary for the news portal Caixin.com.
China will continue efforts to reduce the corporate leverage ratio this year to rein in financial risks, China's top economic planner said on August 8, according to Xinhua.
Yao Yang, who is President of the National School of Development at Peking University, said debt-to-equity swap projects are a good way to do so while boosting the development of state-owned enterprises (SOEs), because many SOEs suffer from poor management and the ineffective utilization of capital and have accumulated a significant number of bad debts or potential bad debts. A market-oriented debt-equity swap program would allow companies to exchange their debt for stocks, which would to some degree alleviate debt pressure.
In the long term, Yao said the government should slow down the pace of money supply, for instance by controlling the overheated real estate industry. The country should further push domestic consumers to engage in consumption, rather than encouraging them to save money. Further, the direct financing ratio needs to increase, which means reducing indirect financing (such as through banks).
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