Surging debt ratio is a concern

Source:Agencies Published: 2013-7-31 22:13:02

While the country's financial system is admittedly flawed, it's not the main reason for the spate of Wenzhou entrepreneurs fleeing to avoid creditors in recent few years. The surging debt ratio of Chinese enterprises probably deserves more attention from financial regulators and banks.

Wenzhou's enterprises are already heavily indebted to private lenders. Many companies' debt ratio has exceeded 80 percent.

The recent shortage of liquidity in the financial system trapped some companies in a cash crunch and created ripple effects that sent the regional market into a crisis. The past two years have also seen the shadow banking system drive up the overall debt ratio of enterprises. This needs to be lowered to achieve sustainable growth, but hasty and forcible actions will lead to an economic downturn or even a crisis.

The main fault lies with the lack of a robust mechanism for equity capital formation. The country's capital market is still underdeveloped.

It does not have adequate legal and credit information systems to reduce financial risk and provide protection for equity investment.

The author is Fang Fenglei, a partner at Hope Investments Management Co Ltd.

Caixin.com


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