💼 Brief Take: The SOE Circles
State-linked entities in countries such as China and Indonesia enter into circular transactions.
China and Indonesia have one thing in common: the circularity of their state-linked entities.
Both countries need to break this cycle by getting third-party funding and unclogging their bad debt.
Beijing is ramping up support towards clearing public-sector arrears owed to businesses, but some localities may hesitate to take on new bank loans due to cost concerns, Caixin reported on 15 October 2025.
Eveline’s Take:
🛟 China and Indonesia have one thing in common: the circularity of their state-linked entities. China’s LGFVs are vehicles for local governments to raise off-balance-sheet debt, such as loans and bonds that are taken up by state-owned banks and other domestic investors. Indonesian SOEs are also interconnected via a web of criss-crossing relationships, including bank and trade debt.
🛟 I wrote on 12 September that China is moving to clear the unpaid bills that have stifled business recovery for years, but transferring the risk from local governments to the banking sector may create another problem down the road if there’s no market mechanism for bad debt to exit the system.
🛟 Arrears owed by local governments likely reached around CNY 4.5 trillion (USD 632 billion) this year, more than 3% of China’s GDP, Caixin reported, citing an estimate by China Chengxin International Credit Rating. China’s “Big Six” state-owned lenders and 12 joint-stock banks were tasked with helping to clear some of these arrears, such as by supporting local SOEs and LGFVs.
🛟 However, several bankers told Caixin that most of the arrears owed by the SOEs stemmed from projects that they took on behalf of local governments. Issuing new loans to these SOEs may amount to creating more off-the-books government debt, one of the bankers said.
🛟 In Indonesia, the SOEs have been practising “gotong royong” or burden-sharing for years. Flag airline Garuda Indonesia, for example, owed trade payables to its state-owned peers including energy giant Pertamina, ground service provider Gapura Angkasa and airport operator Angkasa Pura. It also reported long-term loans from state-owned lenders such as Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Mandiri.
🛟 The state-owned banks rolled over their loans to Garuda while Pertamina is converting the airline’s fuel debt into equity. Sovereign fund Danantara also injected capital to plug Garuda’s negative equity, which partly came from the dividends pooled from other SOEs. As I wrote yesterday, Indonesia is on an all-out mission to turn around the national carrier.
🛟 Another similarity between Indonesia and China is their need to break the circularity of their SOEs by getting third-party funding and unclogging their bad debt. While both countries seem to be trying to do something, their success depends on whether there are enough takers outside their SOE circles.