Economic Slowdown in China Reveals Excessive Debt in Private Companies

The entrepreneurs of China’s great economic boom are facing the consequences of their strategic mistakes.

China’s economic slowdown revealed that many of the star entrepreneurs who contributed to the explosive economic growth made serious strategic mistakes, The Wall Street Journal reported.

Hurun Report, Shanghai’s wealth-tracking system service, said that China was creating four billionaires a week in 2018. However, as China’s economy slows to its weakest growth in more than 25 years, the mistakes that companies have made has become transparent.

Not only do many companies hold excessive debt, but many have over-expanded into riskier and unfamiliar business sectors. Private companies additionally have less pull with creditors and less support under President Xi Jinping, who would rather divert resources to the state sector.

According to the Bank for International Settlements, China’s overall debt has quadrupled in the past decade to approximately three times the value of last year’s national output.

Joseph P.H. Fan, a finance and accounting professor at Chinese University of Hong Kong, said that Chinese entrepreneurs typically “borrow as much as possible, even if the core business doesn’t need it”. He suggests that China’s top-down system allows entrepreneurs to be successful in times of economic growth, but does not offer much protection during a slowdown.

China’s expansion maxed out at 10.6% in 2010, but economists worry that the government’s goal of 6% growth will not be achieved this year. More than 18,000 companies successfully filed for bankruptcy last year, almost twice as many as the previous year.

Economists also noted that the rapid buildup of debt typically preceded recessions in other countries and Beijing signaled that “some of yesterday’s stars aren’t worth saving”.

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