China Financial Daily:Central SOEs May Further Deleverage in 2H17

Central SOEs May Further Deleverage in 2H17 (China Sec. Journal, Aug 10).

    China may impose policies to facilitate the deleveraging of central SOEs, andcontrol their overseas M&As and expansion in financial industry in 2H17, localmedia reported. As of June 2017, total liabilities of SOEs in China amounted toRmb94.1trn, up 11.4% yoy, among which central SOEs’ liabilities wereRmb49.8trn, up 9.2% yoy. Debt ratio (liabilities/assets) was 65.6% for all SOEsas of June, down from 66.1% at end-2016. PBOC will launch detailed policiesrelated to corporate financial holding entities and debt-to-equity swapmeasures, and SASAC may also release rules on central SOEs’ financialholding structure. Central SOEs include China Merchants Group, PowerConstruction Corporation of China, and Sino Steel all expressed to adoptdeleveraging measures going forward and focus on main businesses,according to the report.

    (DB view) We’ve seen improving profitability of China SOEs and industriescorporates thanks to supply-side reform and rebalance of supply-demanddynamics. Industrial SOEs, which made up 12% of China’s total debt, wereperceived as the most troubled sectors, as half of them are in traditionalovercapacity sectors. The profitability improvement and deleveragingmeasures should relieve asset quality concerns and be supportive for banks’asset yield. We prefer big banks over smaller banks. Please see our report -Time to accumulate big banks.