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 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 percent 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 percent, 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.
HIGHER BORROWING COSTS
China Erzhong Group (Deyang) Heavy Industries Co <601268.SS>, a
loss-making manufacturer of equipment for the steel and power
industries, faces higher borrowing costs after a wholesale
restructuring, said Huang Guozhan, an executive at the company's
board secretary's office.
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.
ASSET SALES
China's massive holding companies, power producers and construction
materials 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, Thomson Reuters data show.
Leverage in freight and logistics services reached 85 percent in
September, forcing a wave of asset sales. Changjiang Shipping Group
Phoenix Co <000520.SZ>, one of five listed companies under Sinotrans
& CSC Holdings Ltd <SASACG.UL>, another central government company,
has been selling ships and borrowing money from its parent after its
4.9 billion yuan investment in new vessels turned sour.
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The dry bulk goods shipper, which is in bankruptcy restructuring,
has been sued for loan repayment by five banks, including China
Merchants Bank Co <600036.SS> and China Minsheng Banking Corp
<600016.SS>. It also faces lawsuits by the leasing arm of the
Industrial and Commercial Bank of China <601398.SS> and China
Petroleum and Chemical Corp <600028.SS> for unpaid bills.
Other state-backed firms, including China Cosco Holdings <601919.SS>
<1919.HK> and Angang Steel <000898.SZ> <0347.HK>, have returned to
nominal profitability by turning to their corporate parents to sell
assets.
OVER-INVESTED?
Exacerbating China's corporate troubles has been the questionable
use of 4 trillion yuan in stimulus that Beijing pumped into the
economy following the onset of the global financial crisis in 2008,
explained Lee of Standard & Poor's.
"Many companies invested heavily into competitive and low-return
projects because funding was readily available," he said. "These
investments aren't doing well and are making little contribution to
profitability."
Although leverage at China's mid-sized and large companies started
to decline in the second half of last year, building down debt
positions will be difficult, said Merrill Lynch analyst David Cui.
"The beast grew so fast you can't control it easily now. A sense of
urgency will develop only if there is significant disturbance to the
financial system."
China's bonds, which in the past behaved more like pure interest
rate products, have started to price in credit risk, with the coupon
gap between AA and AAA-rated companies for 5-year bonds doubling in
recent weeks.
Last month, AA-rated Ningxia Baota Petrochemical raised 800 million
yuan, offering to pay 242 basis points more than a coupon paid by
AAA-rated Beijing State Owned Asset when it raised 3.5 billion yuan.
The gap between two similarly rated 5-year bonds in December was 132
basis points.
($1 = 6.0984 Chinese yuan)
(Additional reporting by Fang Yan in
Beijing and Reshma Apte in Bangalore; editing by Ian Geoghegan)
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