China has recently advised its state-owned enterprises (SOEs) to keep a close eye on their finances as the country’s top leadership has made de-risking a key economic priority. The move reflects the growing challenges that China’s state-led economy poses for both domestic and foreign businesses, as well as the potential impact on the global financial system.
According to a report by the South China Morning Post, China’s State-owned Assets Supervision and Administration Commission (SASAC), which oversees more than 100 central SOEs, issued a notice on Monday urging them to improve their financial management and prevent risks. The notice came after a meeting of the Central Financial and Economic Affairs Commission, chaired by President Xi Jinping, last week, which stressed the need to “resolutely prevent and defuse major risks” in the economy.
The notice said that SOEs should “strengthen their awareness of risk prevention and control, and effectively prevent various financial risks from spreading and accumulating”. It also called for SOEs to “improve their internal control and audit systems, and strictly implement the accountability system for financial management”.
The notice did not specify what kind of risks the SOEs were facing, but analysts said they could include rising debt levels, defaults, fraud, and regulatory changes. Some SOEs have already encountered financial troubles in recent months, such as China Huarong Asset Management, a state-owned bad debt manager, which delayed its annual results amid concerns over its solvency. Another SOE, China Evergrande Group, a property developer, has also faced liquidity pressure and ratings downgrades due to its massive debt burden.
State-led economy poses challenges for foreign firms
The SASAC’s notice also highlighted the increasing role of the state in China’s economy, which has become more evident since the outbreak of the coronavirus pandemic. The Chinese government has relied on SOEs to support the economic recovery and implement its strategic goals, such as technological innovation, carbon neutrality, and poverty alleviation. At the same time, the government has tightened its regulatory oversight and ideological guidance over various sectors, such as finance, technology, education, and entertainment.
These developments have posed challenges for foreign firms that wish to enter or expand their operations in China’s domestic market, which boasts 1.4 billion potential consumers. Foreign firms have long complained about unequal treatment and market restrictions in China, as favoritism is shown to SOEs and domestic private firms. They also face uncertainties over political and regulatory risks, such as data security, censorship, and capital controls.
For example, China has recently urged some SOEs to drop the four biggest global accounting firms, namely PwC, EY, KPMG, and Deloitte, due to concerns about data security and foreign influence. China has also been reluctant to allow offshore authorities to access the audit papers of Chinese companies listed in the US, citing national security concerns. This has led to a standoff with the US securities regulators, which could result in the delisting of some Chinese firms from the US stock exchanges.
Global financial implications of China’s de-risking campaign
China’s de-risking campaign also has implications for the global financial system, as China is the world’s second-largest economy and a major source of growth and demand. China’s debt-to-GDP ratio has risen to over 300% in 2020, according to the Institute of International Finance, making it one of the most indebted countries in the world. China’s financial system is also interconnected with the rest of the world, as China is a major borrower, lender, and investor in the global markets.
Therefore, any financial instability or crisis in China could have spillover effects on the global economy and financial markets. For instance, a wave of defaults by SOEs or private firms could trigger a loss of confidence and a liquidity crunch in China’s domestic market, as well as contagion and volatility in the international market. A sharp slowdown or hard landing of China’s economy could also dampen the global recovery and trade, as well as the demand for commodities and other goods and services.
However, some analysts also argue that China’s de-risking campaign could have positive effects on the global financial system in the long run, as it could improve the quality and sustainability of China’s growth and reduce the systemic risks. China’s authorities have shown their ability and willingness to intervene and stabilize the market when necessary, as well as to implement reforms and opening-up measures to enhance the efficiency and transparency of the financial system. China’s de-risking campaign could also create opportunities for foreign firms that can adapt to the changing environment and provide solutions and services that meet China’s needs and standards.