China Takes On State-Owned Firms

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SOEs are huge, and so are their liabilities. They're responsible for non-financial corporate debt equal to 90 percent of gross domestic product. Facing limited competitive pressure, they've driven the worst of China's debt-led excess: Return on assets for these firms in 2016 was a paltry 2.9 percent, compared to 10.2 percent in the private sector.

One reason is that China's banking industry, which is itself almost exclusively state-owned, channels loans to SOEs in the expectation that they'll have an implicit government guarantee. SOEs provide only 16 percent of China's jobs and less than a third of its output, but they receive an astonishing 30 percent of all loans. With credit so easily available, they have little incentive to economize.