Bank of Korea: "Chinese Corporate Debt Hits Record High... Must Prepare for Impact on Korean Exports"

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] An analysis has emerged suggesting that the record-high increase in corporate debt in China could also impact South Korea's exports to China.

On the 23rd, the Bank of Korea stated in its Overseas Economic Focus report titled 'Current Status of Chinese Corporate Debt and Assessment of Potential Risk Factors' that the ratio of corporate debt to China's Gross Domestic Product (GDP) increased from 157.6% in 2016 to 151.9% in 2019, and further to 162.3% last year.

It added, "China's economy showed a faster recovery compared to major countries, supported by successful COVID-19 containment and active stimulus measures, but corporate debt reached an all-time high. Amid strengthened sanctions on Chinese companies due to US-China conflicts, concerns over excessive debt in Chinese companies, including defaults by state-owned enterprises, continue to be raised," it explained.

Most of Chinese companies' financing comes from bank loans, with state-owned enterprises having higher debt and leverage levels compared to private companies. Additionally, due to the economic downturn caused by US-China tensions and the COVID-19 aftermath, government loan support increased, leading to a sharp rise in debt among small private enterprises. In particular, real estate companies showed higher debt levels than other sectors, reflecting increased investment in real estate over time.

The vulnerability debt of Local Government Financing Vehicles (LGFVs) has also been continuously increasing during the process of local economic development and revitalization. LGFVs are state-owned enterprises that raise investment funds secured by assets granted by local governments. These LGFVs face growing credit risks, especially in financially weak localities such as the southwestern regions, raising concerns about constraints on their growth. Furthermore, the Bank of Korea explained that the increase in debt due to liquidity support from Chinese authorities after COVID-19 has delayed the restructuring of marginal companies, which could act as a negative factor.

Moreover, since such corporate debt in China could affect South Korea's exports to China, there is an analysis that preparations are necessary. The Bank of Korea stated, "While major institutions assess that the possibility of corporate debt expanding into a systemic risk is limited considering the government's fiscal capacity and financial system control capabilities, in the medium to long term, the adjustment process of corporate overinvestment could act as a factor slowing China's economic growth," it said. It also emphasized, "If Chinese corporate investment activities slow down, it could impact South Korea's exports to China, which have a high proportion of intermediate goods, so preparations are necessary."