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State-Owned Enterprises Leverage as a Contingency in Public Debt Sustainability Analysis: The Case of the People's Republic of China

Benno Ferrarini () and Marthe Hinojales ()
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Benno Ferrarini: Asian Development Bank
Marthe Hinojales: Asian Development Bank

No 534, ADB Economics Working Paper Series from Asian Development Bank

Abstract: We reflect state-owned enterprises’ (SOE) leverage within the standard debt sustainability assessment framework. Based on company data and the interest coverage ratio as a measure of debt at risk, aggregate baseline projections and fan charts gauge SOE debt as a contingent liability to the public sector. We find that SOE leverage in the People’s Republic of China has grown to a large liability that deserves the urgent attention it has been receiving from the authorities. While there is no room for complacency, there is no need for panic either; even if authorities had to step into mop up as much as 20% of SOE debt at risk gone bad, this would appear to be manageable at roughly 2.7% of the gross domestic product in 2016 or 5.5% by 2021. These findings are reflective of discretionary assumptions about future developments in the SOE sector and the broader economy—including baseline conditions premised on preventive government action to slow borrowing—that are adjustable to reflect analysts’ prerogatives and expectations.

Keywords: contingent liabilities; corporate leverage; People’s Republic of China; public debt sustainability; state-owned enterprises (search for similar items in EconPapers)
JEL-codes: G01 G21 H30 H60 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-01-26
New Economics Papers: this item is included in nep-cna and nep-tra
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