Things are not looking for for China.
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HONG KONG Beijing might have averted a disaster in its inventory markets with heavy-handed intervention, however the world’s largest corporate debt pile – $16.1 trillion and rising – is a a lot larger threat to its slowing financial system and won’t be so simply managed.
S&P estimates Chinese companies may seek up to US$57 trillion in refinancing and new debts from 2015 to 2019, with the country alone contributing US$23 trillion, or 40 per cent, of the global demand.
Corporate debt in China is 160% of its GDP and twice the size of similar debt in the US.
Up until this point, most of Beijing’s economic policy interventions have been geared towards supporting growth, which is projected to reach a 25-year low this year. But this year, it is set to reach a twenty five-year low.
Through the economic interventions, interest rates have been cut four times within the past 8 months, and the amount of bank reserves has been further reduced, while lending limitations from within deposits have been removed.
Although China wants more credit going to smaller, innovative companies, these measures don’t really paint a complete picture when thinking about the economy as a whole.
“When the credit taps are opened, risks rise that the money is going to “problematic” companies or entities” said Louis Kujs, RBS chief economist for Greater China.
China’s banks made 1.28 trillion yuan ($206 billion) in new loans in June, well up on May’s 900.8 billion yuan.
The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed, but there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high and banks are reluctant to take risks.
“The coming two years would see a huge number of Chinese companies required to pay their debts while Beijing is very likely to extend the maturity dates for those who would otherwise default, which might result in even more debts piling up”, Wong said.
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Mr Gao Hong, investor relationship principal at railway equipment maker Jinxi Axle Co, whose debt-to-core-profit ratio rose to 10.25 between 2010 and past year, said the company had struggled to find profitable projects to invest in, and so put money into short-term bank products that guaranteed returns. This figure climbed to 5.3 times at end 2014. In the case of energy companies, debt has gone up from 1.1 to 4.4 times the core profits. For industrials, from 2.5 to 4.2. That’s where I am today.
