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May 20, 2015 | 16:28 GMT

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China's Corporate Debt Problem Remains Unsolved

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China's Corporate Debt Problem Remains Unsolved

On May 14, the Chinese government announced that by September it would complete the first phase of a new plan allowing local governments to swap outstanding loans for low-yield, slow-maturing local bonds. Under the plan, localities would have a steady and stable path for repaying the more than $3 trillion in local government debt accumulated during the past six years of rapid post-financial crisis spending. The plan also has the added benefit of lowering local government debt-servicing costs, thus freeing up tens of billions of yuan in liquidity in the short run.

While the plan is a welcome departure from the Chinese government's previous ad hoc methods of managing local government debt maturation, it does not address the larger and more pressing issue of corporate debt. In addition, no comparable plan for managing corporate debt exists. China's corporate debt is more than four times the size of local government debt and sustains the vast majority of employment in China.

At the end of 2014, Chinese businesses owed more than $16 trillion, accounting for 61 percent of the country's total outstanding debt and equal to nearly 180 percent of China's gross domestic product. By comparison, local government financing vehicles owe $3.38 trillion.

Although a plan to improve local government solvency and boost local governments' liquidity could provide a buffer against social and political instability in the short term, corporate debt must be addressed and eased to ensure China's long-term prosperity.

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