China's Tough-Love Steps to Rein in Debt Find Favor, S&P Says

(Bloomberg) -- When China’s central bank governor Zhou Xiaochuan renewed warnings last month about the threat of high leverage, he said that some state firms face severe debt risks and that the problem of "zombie companies" is being solved slowly.

Money managers concerned about those issues in the country’s debt market back tough reforms over central bank tightening, according to an S&P Global Ratings poll.

"Investors prefer administrative solutions to change investment spending and borrowing habits over general monetary tightening," according to the results of the S&P survey of more than 200 investors, intermediaries and other market participants.

When asked which approaches they favored for curbing corporate leverage, a significant proportion of respondents recommended shutting down the zombie companies -- nonprofitable firms that mainly rely on loan rollovers to survive.

Recent steps have included preventing shuttered or illegal steel plants from returning to the market. China’s President Xi Jinping said in October that the world’s biggest producer and consumer of almost all commodities will deepen supply-side reforms and stick to the capacity cuts that have shaken up global raw materials markets.

"We anticipate that authorities will continue with supply-side reforms that have reduced excess capacity in manufacturing and commodities, thereby increasing the debt-servicing capability of companies in these sectors," S&P credit analyst Christopher Lee said in the report.

©2017 Bloomberg L.P.