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     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
[TOPICS: M$A$$$,M$Q$$$,MGQ$$$]