Audit report reveals China’s economic fault lines http://www.scmp.com/print/news/china/policies-politics/article/2099845...

Audit report reveals China’s economic fault lines

PUBLISHED : Sunday, 25 June, 2017, 12:05am
UPDATED : Sunday, 25 June, 2017, 12:05am
News › China › Policies & Politics
Sidney Leng sidney.leng@scmp.com

Discovery that state-run firms were inflating their profits shows problems with reform drive, analyst says
Beijing’s push for structural reforms in the economy appears to have sparked a backlash in the form of companies inflating their profitability,
according to an analyst.

An official audit report published on Friday said that 18 of the 20 state-owned firms that were audited have in recent years inflated their
revenues by more than 200 billion yuan (US$29 billion) and boosted their profits by 20 billion yuan with faked business and manipulated books.

The companies audited include China National Petroleum Corporation, China State Shipbuilding Corporation and Sinochem Group.

Lu Zhengwei, chief economist from Industrial Bank, said that although the fake profits only accounted for a small proportion of total takings at
the country’s state-owned entities – less than 2 per cent – it showed the problems they had deleveraging.

“It proves that China’s economy has plenty of difficulties to deal with,” Lu said.

The report also found that China’s local government debt was increasing too fast in some parts of the country, giving an implicit nod to Moody’s
decision in May to downgrade China’s sovereign rating for the first time since 1989.

Four years after China’s cash crunch, has ‘Mother PBOC’ spoiled her ‘kids’? [1]

Beijing aims to cut overcapacity in heavy industry and lower the overall debt burden to keep growth at an average rate of 6.5 per cent until
2020.

However, this year’s audit report paints a bleak picture of how some of the mainland’s largest corporations have gone against the ruling
Communist Party’s will over the past year.

In October last year, according to the report, nine of the audited firms were still having trouble cleaning up their 187 “zombie subsidiaries” –
heavily indebted entities that were losing money.,

The report also found that China National Building Material, the nation’s largest cement producer, had failed to cut its capacity by six million
tonnes as ordered, and had rented 1.39 million tonnes of capacity from other companies to expand production.

China’s banking regulator orders loan checks on Wanda, Fosun, HNA, others [2]

By the end of last year, the report said, three out of the 18 provinces being audited had illegally approved production of 12.59 million tonnes of
coal and 1.33 million tonnes of steel.

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Audit report reveals China’s economic fault lines http://www.scmp.com/print/news/china/policies-politics/article/2099845...

This flew in the face of official rhetoric about reducing coal and steel capacity by 290 million tonnes and 65 million tonnes respectively in 2016.

When Moody’s downgraded China’s rating by one notch to A1 this May on the basis of insufficient reform to contain debt risks, the central
government said the ratings agency overestimated the risks and underestimated Beijing’s ability to keep them under control.

Credit tightening in China to continue, BAML says [3]

The report also said that at the end of March this year, the amount of outstanding government debt in the 46 audited mainland provinces, cities
and counties had increased by 87 per cent in less than three years.

The last time the National Audit Office mentioned the increase in local government debt in its annual report was in 2012, when it warned of the
danger of overly relying on land revenues or taking in new loans to repay old ones.

Besides local government debt, the report also highlighted non-performing loans, bond defaults and shadow banking as key financial risks.

Source URL: http://www.scmp.com/news/china/policies-politics/article/2099845/audit-report-reveals-chinas-economic-fault-lines

Links
[1] https://www.scmp.com/news/china/economy/article/2099620/four-years-after-chinas-cash-crunch-has-mother-pboc-spoiled-her
[2] https://www.scmp.com/business/banking-finance/article/2099565/chinas-banking-regulator-orders-loan-checks-wanda-fosan-hna
[3] https://www.scmp.com/business/global-economy/article/2099532/credit-tightening-china-continue-baml-says

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