China firms top borrowers as debt hits US$14tr

Mainland bond market replaces the US as the world's biggest, with concern raised over exposure to shadow banking sector

PUBLISHED : Tuesday, 17 June, 2014, 5:13am
UPDATED : Tuesday, 17 June, 2014, 5:13am

The Chinese corporate bond market has overtaken the United States as the world's biggest, with the Asian giant looking to soak up a third of global company debt needs over the next five years, Standard & Poor's said yesterday.

The rating agency said Chinese corporate borrowers owed US$14.2 trillion at the end of last year, compared with US$13.1 trillion owed by US firms, with the switch in rankings taking place a year earlier than it had expected.

The Asia-Pacific region, led by China, is seen accounting for half of global corporate debt financing needs of US$60 trillion over the five years to 2018 when the region will account for more than half the projected total debt outstanding of US$72 trillion.

China, the world's second-largest economy was financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.

"This means that as much as 10 per cent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at US$4 trillion to US$5 trillion. "With China's economy likely to grow at a nominal 10 per cent per year over the next five years, this amount can only increase."

Cash flows and leverage at Chinese companies are the worst among global peers, having deteriorated from being the best in 2009, according to a corporate financial risk trend measure used by S&P.

"China's property and steel sectors remain of particular concern," it said, adding that higher land bank and property inventory had led to the sluggish trend in property prices contributing to the decline in steel demand.

S&P expects more defaults in the steel sector, with strains already manifesting in falling iron ore prices this year.

The benchmark iron ore price dropped to a 21-month low of US$91.50 a tonne last week as a supply glut smothered a market faced with slower steel demand. The price has plunged a third so far this year.

"China's large and still-expanding contribution to global corporate debt, the higher financial risk is causing overall corporate risk to increase globally," the agency said.

"As the world's second-largest national economy, any significant reverse for China's corporate sector could quickly spread to other countries."

The emergence of Chinese companies as the biggest group of corporate borrowers and "faster debt growth in sectors related to the growing global middle class are likely to drive global corporate debt issuance over the next four years", said Jayan Dhru, S&P's global head of corporate ratings.

"The US continues on the path to economic recovery while the euro zone struggles with marginal growth, but the bottom line is that this is a China story. Higher risk for China's borrowers means higher risk for the world."

Borrowers from the mainland and Hong Kong have sold US$52.3 billion of securities this year, 55 per cent of total sales in the region outside Japan.

Syndicated loans in the Asia-Pacific, excluding Japan, total US$179 billion in the year to date, compared with US$168.5 billion in the same period last year.

Additional reporting by Bloomberg