EVERYONE in China — and plenty of observers outside it — have warned about the need to rein in leverage in the world’s second-largest economy. What’s gone little recognized is that a large group of its companies has already done just that.

Looking at their capacity to make interest payments along with their debt relative to earnings, listed non-financial enterprises in China on average are in the best shape in more than a decade. The improvement has been propelled by supply cuts, rebounding prices and a boom in global trade that have boosted profit growth.

The strengthening position of China’s companies puts them in better shape to cope with the increase in bond yields being driven by regulators’ efforts to rein in shadow banking.

That offers scope to keep up the campaign and let weaker players default without sparking broader contagion. It could also encourage investors to look again at a bond market with higher returns than other major economies.

“Profitability conditions have improved a lot, not only for the State-owned companies but also the small and mid-cap companies,” said Margaret Yang, an analyst at CMC Markets Singapore Pte. “This will give policymakers more room to push through the deleveraging campaign and keep monetary policy neutral,” she said.

As top officials gather this month for their annual Economic Work Conference to set targets for 2018, they can reflect on the fruits of moves to shut down outdated factories and curb the construction of new capacity: even coal miners and other energy companies are seeing higher profits.

Total debt for almost 4,000 non-financial firms listed in Shanghai and Shenzhen is now on average about the same size as earnings, down from 2.4 times a year earlier, according to data based on the latest filings. Their operating profits can now cover over 18 times interest expense, a significant improvement from just 5 times in 2016.

Chinese factories are probably now using their capacity at a level that covers their fixed costs, according to the assessment of Mark Tinker, head of AXA Framlington Asia in Hong Kong, who’s been watching markets for about a quarter century. That metric means further rises in sales should trigger even faster profit gains. (SD-Agencies)