Defaults, restructurings to rise as Chinese firms' debt soars

PUBLISHED : Wednesday, 26 February, 2014, 1:58pm
UPDATED : Thursday, 27 February, 2014, 4:38am

Mainland 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 US$12 trillion at the end of last year - equal to more than 120 per cent of gross domestic product - according to Standard & Poor's estimates.

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium-sized and large non-financial firms showed total debt soared by more than 260 per cent, from 1.82 trillion yuan to 4.74 trillion yuan (HK$6 trillion), between December 2008 and September last year.

While a credit crisis is not expected any time 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 & Poor's Rating Services in Hong Kong.

"Borrowing costs already are going up due to tightened liquidity," Lee 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 lay-offs could lead to social unrest. In cases where firms have effectively gone bankrupt, domestic bondholders tend to be paid off before other debtors.

China Erzhong Group (Deyang) Heavy Industries, 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 loss for last year of 3.15 billion yuan, held debt of 11.4 billion yuan in September, according to stock market filings.

In July, the State-Owned Assets Supervision and Administration Commission ordered China Erzhong, together with its parent firm, to merge with China National Machinery Industry, another Beijing-controlled group.

China's massive holding companies, power producers and construction materials firms are among the most highly leveraged, with each sector reporting twice as much debt as equity at the end of September, Thomson Reuters data shows.

Leverage in freight and logistics services reached 85 per cent in September, forcing a wave of asset sales. Changjiang Shipping Group Phoenix, one of five listed companies under Sinotrans & CSC, 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.

Other state-backed firms, including China Cosco and Angang Steel, have returned to nominal profitability by selling assets to their corporate parents.