Stories

China is betting big on its state-owned businesses

The biggest surprise to investors of late may not be the success of Brexit or the Trump campaign, but the Chinese government's saving of an economy that looked headed towards a hard landing just one year ago.

Since that time, markets have set aside worries over the China's stability, as we watched the economy find its feet by doubling down on a strategy of higher debt, mostly in the corporate, state-owned sector.

Source: Bank of International Settlements

The Wall Street Journal checks in on the health of these SOEs, pointing out that over the past year, they have binged on debt, with borrowing growth hitting 25% in 2016, compared with private debt growth of just 3%.

Why it matters: The amount of debt the Chinese economy needs to add to create to hit its growth targets rate has risen steadily in recent years, suggesting the strategy of funneling loans for state-owned enterprises to invest is unsustainable. Furthermore, the practice is likely crowding out more efficient investments by China's increasingly innovative private sector.