Chinese Bankruptcies Headed For Jump in 2017: Fitch Ratings

     BEIJING (MNI) - Fitch Ratings said Thursday that bankruptcies in China are

likely to increase along with the government's deleveraging campaign, with

market forces playing only a "minor role" in determining failures among

state-owned enterprises.

     Fitch said in a report that although China's government has become more

accepting of bankruptcies, it is hesitant to let large state-owned enterprises

-- even the so-called zombie companies that account for the bulk of industrial

overcapacity -- fail because of the accompanying job losses and drag on economic

growth such a strategy would entail.

     Both the number of insolvency cases filed with China's Supreme People's

Court and the number of cases resolved are on track for significant increases in

2017, the Fitch report said. Insolvencies rose to 5,665 last year from 3,684 in

2015, while resolved cases totaled 3,602 in 2016, an increase of 43% from 2015. 

     Those numbers, however, are low compared with bankruptcy numbers in other

industrialized countries and regions, Fitch said. In Hong Kong alone, for

example, there were 40,000 bankruptcy cases in 2015 and over 35,000 in 2016.

     Although government authorities have become more accepting of insolvencies,

Fitch said, allowing market forces to come into play would "reduce moral

hazard," and allowing the zombie companies to fail would be "a step toward

improving corporate efficiency and addressing overcapacity."

     But the Fitch report said that insolvencies among companies most in need of

restructuring were rare, relative to the pace it happens in other large

economies. Just 10% of bankruptcies so far this year have come in China's real

estate sector, where 45% of companies have been classified as zombies, the Fitch

report said. The same is true in the state-owned sector and in the steel sector,

it said.

     "The authorities may continue to favor mergers of weak companies with

stronger ones as a less disruptive alternative to outright bankruptcy for large

enterprises, given that maintaining high and stable economic growth remains a

primary policy target," the report said. "Local governments are also likely to

continue supporting troubled enterprises that are sizeable employers in their

localities."

     Fitch also warned that a slowdown in credit growth -- in line with the

government's deleveraging campaign -- suggests firms face the prospect of slower

growth next year.  

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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