China’s Companies Are Like A Snake Eating Its Own Tail

China’s state-owned enterprises are a snake eating its own tail.
Profits are falling, in part because of the costs of paying back debt. They are responding by adding more debt, making the matter worse.
In the first nine months of 2015, profits fell 8.2% across the board, according to state media organisation Xinhua. The slowdown accelerated in September, according to the report.
That, when coupled with their hefty debt load, has everyone from Wall Street analysts to the International Monetary Fund worried.
‘This situation makes servicing debt obligations more difficult. In particular, the interest coverage ratio has fallen in SOEs, which have contributed to the bulk of the rise in credit,’ wrote the IMF in a report last month.
Unfortunately, the IMF also points out, without that debt some of these companies wouldn’t be able to function.
‘At the same time, deleveraging by firms could weigh on growth, while mounting corporate defaults would have adverse effects on bank balance sheets and credit availability, and thereby further weaken growth.’

This post was published at David Stockmans Contra Corner on October 25, 2015.