China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.
Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 per cent of GDP – according to Standard & Poor’s estimates.
Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.
While a credit crisis isn’t expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.
More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor’s Rating Services in Hong Kong.
“Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.” China rarely allows corporate failures, particularly of state-backed companies, partly out of fear that widespread layoffs could lead to social unrest. In cases where firms have effectively gone bankrupt, domestic bondholders tend to be paid off ahead of other debtors.
China Erzhong Group (Deyang) Heavy Industries Co, a loss-making manufacturer of equipment for the steel and power industries, faces higher borrowing costs after a wholesale restructuring, said Huang Guozhan, an company executive.
The Sichuan-based firm, which expects to report a 2013 loss of 3.15 billion yuan ($516.5 million) and may see its shares suspended, held debt of 11.4 billion yuan in September, according to stock market filings.
In July, China’s State-Owned Assets Supervision and Administration Commission ordered China Erzhong, together with its parent company, to merge with China National Machinery Industry Corp, another Beijing-controlled enterprise group.
A management reshuffle followed, while a proposed 1.9 billion yuan asset sale was cancelled. Accumulated losses may drive up the cost of the company’s loans, Huang said, should banks cut the company’s ratings.
“Tight credit growth and higher borrowing costs will make it a tough year,” said Stephen Green, head of China research at Standard Chartered Bank.
China’s massive holding companies, power producers and construction firms are among the most highly levered in the world’s second-largest economy, with each sector reporting twice as much debt as equity at end-September, data show.