S&P Report Reveals True Extent Of China’s Corporate Debt

By Michele Penna

The notion that Chinese companies have an increasingly large problem with debt is not new, but a recent report by Standard and Poor’s, one of the three US rating agencies, has shed some extra light on the extent of the difficulties faced by the People’s Republic.

The report, titled ‘Credit China Spotlight: Financial Risks Are Rising For The Top 200 Corporates,’ argues that “Weaker revenue growth and margins have offset moderating capital expenditure. Many industries are also battling chronic overcapacity, low profitability, and rising leverage.”

Christopher Lee, an analyst with S&P, is quoted in the report as saying he expects some companies to experience “considerable pain, even possibly consolidation or default,” noting that, “Asset-heavy and capital-intensive sectors are the most vulnerable.” Mr. Lee also told Reuters that, “The baseline assumption is that the next 12 months could see an acceleration of corporate stress. The deteriorating trend is still there in almost all industries.”

The underlying cause of such problems is debt, which Chinese companies have been very fond of accumulating in recent times. According to a report published earlier this year by S&P, in 2013 China overtook the United States to become the largest outstanding corporate debt holder in the world. In June, China’s state-owned Global Times quoted the Chinese Academy of Social Sciences (CASS) as saying that “Chinese nonfinancial corporations owed 58.67 trillion yuan ($9.41 trillion) to their creditors by the end of 2012, representing 113 percent of GDP that year.”

The massive borrowing can be traced back to the 2008 financial crisis, which put the Chinese government in a tight spot: faced with strong headwinds, it had to choose between stimulating the economy and dealing with underperformance. Authorities chose the former, and opened the floodgates of credit.

The flood was powerful and the government successful, for growth was soon nosing up again. But the policy had serious collateral consequences: by injecting money into the system, authorities encouraged a credit binge. Debt subsequently rose from about 125 percent of GDP in 2008 to over 250 percent this year (to be precise, according to Standard and Chartered 251 percent in the second quarter of 2014.)

Part of this credit has served to finance projects whose profitability is questionable and a significant part of it has been channeled through the so-called shadow banking sector, as largely unregulated unofficial lenders are usually called. In an opinion piece published on Project Syndicate, Andrew Sheng, a fellow of the Fung Global Institute, and Xiao Geng, director of research at the same institute, said that, “Since 2008, SOEs and so-called local-government financing platforms have been using loans to fund massive fixed-asset investments, while private-sector actors have been borrowing – often from the shadow-banking sector – to finance investment in real-estate development.”

In its recent study, S&P shows some optimism regarding the future, arguing that “As China transitions into a more balanced growth model and introduces financial and economic reforms, the credit profiles of some companies should start to slowly improve over the next few years.” However, the authors caution that Beijing will find it hard to bring the corporate sector back to life, and that state-owned enterprises will, “Play a critical role in the government’s reform program because these behemoths account for the largest share of debt and assets in the corporate sector.”

Courtesy of Asian Correspondent

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