On 21 September, S & P downgraded China one notch from AA- to A+, citing debt growth risks.
An earlier September report of BBVA, a Spanish bank, points out that China's corporate debt levels, at least in the non state-owned sector, has shown early signs of improvement, adding to prospects for growth resilience. Download BBVA - Early Fruits of China's Deleveraging Add to Growth Resilience However, despite China's riposte, S & P sticks to its downgrade.
The downgrade is a reflection of how successful China has been viewed in its much-slated "Supply Side Structural Reform" (SSSR).
SSSR has somewhat different emphasis in the context of China's state-directed capitalism. In the West, especially in the United States, SSSR usually means tax cuts, rolling back trade union influence, deregulation and privatization. In China. where state-owned enterprises are an instrument of state strategies, the reform means reduction of excess capacity, lowering corporate financial costs (including the reduction of administrative fees), lowering barriers to entry, streamlining regulations, and tax reduction for targeted sectors such as innovation and domestic consumption.
China's Central Economic Work Conference (CEWC) in 2015 identified five specific SSSR focuses - known in Chinese as the “three cuts, one reduction, one strengthening” (三去一降一补), namely -
1. Cutting (industrial) overcapacity
2. Destocking (property inventory)
3. (Corporate) deleveraging
4. Lowering corporate costs
5. Improving “weak links”
A 2017 report of The Economist Intelligence Unit "China’s supply-side structural reforms:Progress and outlook" provides a good up-to-date analysis of how China has fared under each of the five headings. Download EIU's Report on Chinas-supply-side-structural-reform
As for state-owned enterprises (SOEs), the BBVA report finds that in 2016 alone, China successfully cleaned up 4,977 "zombie enterprises" involving total assets of RMB 412 billion. It notes that President Xi has pledged to put the tasks of deleveraging SOEs and tackling the shadow banking sector on top of China's reform agenda.
However, such reform must likewise be looked at in the context of the strategic role played by SOEs in China's context, not to mention potentially massive unemployment consequences. According to the report, SOE reform is likely to take the form of M & As to eliminate waste and inefficiencies, improvements ion corporate governance, and selected diversification of ownership to include the private sector.
These likely measures are a continuum of SOE reform measures adopted at the Third Plenum of China’s 18th Party Congress in November 2013. These included targets of returning 30% of SOE profits to public finances by 2020, up from 5-15% at present, and increasing SOEs private stock holdings.
In a move that possibly kills several birds with one stone, on 1 October, the People's Bank of China, China's central bank, lowered reserve ratios for banks that meet "inclusive finance" requirements of lending to small businesses, small family companies, farmers, students and poverty alleviation programs. Reserve ratios are 15-17% of assets. These will be lowered by half percentage point for banks that have at least 1.5% of loans in inclusive finance, and by 1.5 percentage points for banks with at least 10% of loans in inclusive finance. This serves to break the virtual monopoly of bank loans by state-owned enterprises, boost the more productive small-and-medium-sized business sector, and help relieve poverty.
In a broader context, SSSR is one of four leading strategic goals in China's coming trajectory. These include the Belt and Road (B&R) Initiative, "nationwide innovation and start-ups", and "new urbanization and smart cities".
