China Economy

Mainland corporate borrowing soars to service debt

Mainland faces growth threat as loans surge to US$1.7 trillion from US$604 billion in 2007

PUBLISHED : Tuesday, 29 January, 2013, 12:00am
UPDATED : Tuesday, 29 January, 2013, 5:31am


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Mainland companies are spending more than ever to service debt after their borrowing almost tripled over five years, prompting strategists to warn of rising default risk and a threat to economic growth.

Total short and long-term borrowing by 3,895 publicly traded non-financial companies rose to almost US$1.7 trillion in their latest filings, from US$604 billion at the end of 2007, data shows.

Financing costs, including interest, on all forms of debt climbed to the highest level as a percentage of gross domestic product last year, according to Sanford C. Bernstein.

Bernstein says that means less cash for investment to fuel the world's second-largest economy, while Royal Bank of Scotland says the threat of defaults will hold back interest-rate liberalisation. The average 10-year yield for top-rated company bonds is near a 13-month high at 5.27 per cent, compared with the 2.6 per cent yield in a Bank of America Merrill Lynch global corporate index.

"There's just a lot more debt in China today than there was really ever in the past, relative to nominal GDP," said Mike Werner, a Hong Kong-based analyst at Bernstein. "More and more of the country's resources have to be put to just financing outstanding debt, and that itself is a headwind for economic growth."

While the nation exited a seven-quarter slowdown in October-December as the government eased monetary policy, incoming premier Li Keqiang may need to confront the fading effects of government support, a likely pickup in inflation and rising risks from shadow banking.

Price growth accelerated to a seven-month high last month, driving up benchmark bond yields. GDP grew 7.8 per cent last year, the slowest in 13 years. Banks doled out 8.2 trillion yuan (HK$10.2 trillion) of new loans last year, 10 per cent up from 2011 and the second-highest level on record, central bank data shows. The government quota for new lending might be set at 9 trillion yuan this year, Caixin reported last week.

A 17.6 trillion yuan binge of stimulus lending in 2009-10 stoked inflation, weakened banks' financial buffers and led to an increase in non-performing loans.

Since then, the economy had become a "credit junkie, requiring increasing amounts of debt to generate the same unit of growth", analysts Edward Chancellor and Mike Connelly at investment firm GMO wrote in a research note this month.

Total credit in the economy climbed to about 190 per cent of GDP by the end of last year, up from 124 per cent in 2008, Fitch estimated this month.