Chinese State Owned Enterprises enjoy below market interest rates and seemingly strong profits would evaporate if they were to pay market interest rates, according to research by the Kong Kong Institute for Monetary Research. SOE's are notorious for expecting forbearance on these already preferential loans, and the main source of Non Performing Loans in past crises. The presumption is China's infamous guanxi, or relationships, pressure banks into lending to SOEs.
Commanding lower than market rates given a company's risk profile exposes the banking sector and it's shareholders. Indeed, a 2006 study of 20,0000 small and medium sized business showed that SOEs were much likely to generate bad debt than private enterprises. The poor payment history of SOE's does not bode well for banks who have been funneling money from SOE's ranging from Salt minders, Soybean crushers to Railroads, so they may speculate on Land. Indeed, an estimated 82% of land auctions went to SOEs, who paid 27% above market rates of equivalent properties. At best, one can expect dilution with share issuance or bailouts if and when these loans begin to turn sour.
Are the Profits of State Owned Enterprises Real
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.