China corporate insolvencies expected to rise 20pc this year as economy slows
A wave of corporate collapses is expected in both mainland China and Hong Kong as insolvency cases look set to soar in a slowing economy, says a credit insurer.
Fabrice Desnos, head of Asia-Pacific of credit insurer Euler Hermes, said insolvency cases in mainland China were expected to increase 20 per cent this year, following a 24 per cent jump last year. He expects the trend to hold for some time, with insolvencies growing a further 10 per cent next year.
“In mainland China, the growing number of company insolvencies is caused by the economic slowdown and deflationary pressures, which undermine companies’ profitability. We should also pay attention to the high level of corporate debt, which had increased to 166 per cent of [gross domestic product] in the third quarter of last year, compared with 124 per cent in 2014,” he told the South China Morning Post.
Payment delays are also on the rise. The average payment day from the date the bills are issued rose to 91 last year, 16 days more than in 2012.
The situation was similarly grim in Hong Kong, Desnos said, with corporate insolvencies expected to rise 15 per cent this year after jumping 13 per cent last year. Next year was likely to see a 5 per cent increase, he added.
“In Hong Kong, rising corporate risks are highly correlated to lower external demand, especially from mainland China. This affects the domestic economy through the exports channel, but also through the retail sector that is highly dependent on tourism,” he said.
Mainland China could adopt monetary easing and reform state-owned enterprises to enhance their efficiency, but the process might lead to job losses, which might also hurt consumption, Desnos said.
“The deleveraging and the SOE restructuring, which would lead to higher job losses, may hinder growth more than expected. We expect economic growth to slow further to 6.4 per cent in 2017,” he said.
Desnos is, however, upbeat on the “One Belt, One Road” project, which aims to link China with its neighbours through a web of infrastructure projects that raises interconnectivity. He said these projects would foster trade and internationalisation of the yuan, boosting the economy. Hong Kong could play a major part in it by raising funds for these projects from international investors.
While Chinese companies already had debt problems, he said fundraising for “One Belt, One Road” would not be a problem.
“There is a big difference between borrowing to repay existing debt and borrowing to finance future expansion,” he said.
The Chinese government, rather than companies, would finance the Belt and Road project, so it was unlikely to have an adverse effect on corporate debt, Desnos said, even as companies stood to gain as trade links improved.
“Chinese firms are likely to be well positioned to land the contracts for infrastructure projects. It will also benefit China’s exporters of construction materials, including steel and iron ore. This will help reduce its domestic overcapacity,” he said.