Bankruptcies in China will continue to increase the remainder of the year, yet the total number does not compare to those of other large economies. China saw more than 5,600 insolvency cases in 2016 after 3,600 in 2015, said a report from Fitch Ratings.
There were 4,700 cases filed in the first half of 2017 alone. Cases are being resolved at a higher rate as well with just over 3,600 last year, which is up roughly 40% from 2015. This year, there have been more than 1,900 resolved cases.
The reason for the rise in bankruptcies is partially due to China becoming more accepting. China’s authorities “have made efforts to improve the insolvency framework,” said Fitch. Zombie enterprises, which are entities that rely on government support and state bank assistance to stay afloat, “are responsible for the most significant corporate inefficiencies and account for the bulk of overcapacity.”
To put China’s bankruptcies in perspective, France had more than 55,000 last year, while the U.S. had less than 25,000. As an alternative to outright bankruptcy, “authorities may continue to favor mergers of weak companies with stronger ones,” added the report.
Fitch believes “bankruptcies are likely to continue rising quickly over the next few years in light of rising policy attention and the tightening of credit conditions since late 2016.” Firms will also face slower growth due to the deceleration in credit growth, which can be seen in Fitch’s gross domestic product growth forecast for 2018.
– Michael Miller, editorial associate