China’s Economy: What Goes Up Must Come Down

Corporate Finance & Restructuring

December 15, 2015

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Much of the news coming out of China over the last quarter has been dominated by the recent stock market falls. Between June and September 2015 the Shenzhen Component Index fell over 51% from its June peak to 9,290 points, with the Shanghai Index falling by a similar amount.

Although we’ve started to see some signs of potential stabilisation in the last couple of months, with the Shenzhen Component Index climbing back to 12,495 as at 12 December 2015, China still has a lot on its plate as this short article considers. Whilst recent conditions may have led to consequences for domestic demand (as private retail investors realise their losses on their stock market investments) in our view there are also some far more significant longer-term issues in play which will need to be addressed.

Corporate debt in China continues to grow, and now sits at disturbingly high levels, based on standard leverage metrics –Q3 2015 research from GMT Research suggests corporate debt leverage stands at approximately 7 times gross debt to operating cash flow, about the same level as Spain and more than double the level of advanced industrialised economies (US, Japan, Germany, UK).


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