Haitong Securities warns of default crisis as mainland debt soars

Leading securities firm raises default risk as companies borrow more to repay old debt

PUBLISHED : Thursday, 09 January, 2014, 1:27am
UPDATED : Thursday, 09 January, 2014, 1:27am

The mainland's record debt threatens to trigger a financial crisis as borrowing costs jump to unprecedented highs despite a cooling economy, the nation's second-biggest brokerage says.

Liabilities at non-financial firms might rise to more than 150 per cent of gross domestic product this year, raising default risks, Haitong Securities said.

The ratio of 139 per cent at the end of 2012 was already the highest among the world's 10 biggest economies, according to the most recent data. That compares with 103 per cent in Japan and 78 per cent in the United States, figures from the Bank for International Settlements and the World Bank show.

"We are concerned that the debt snowball may get bigger and bigger and turn into a crisis," said Li Ning, a bond analyst at Haitong Securities. "Default probabilities from next year may rise because more and more Chinese companies depend on new borrowings to repay old debt."

Premier Li Keqiang has driven up money market rates to help deleverage the economy, as Moody's Investors Service warned this week that credit expansion could spark a financial crisis.

If monetary policy remains tight, it will result in more debt defaults

Companies must repay a record 2.6 trillion yuan (HK$3.3 trillion) of borrowings this year even after bond yields surged and economic growth slowed to the weakest in more than a decade.

The rate on AA-minus five-year notes rose 146 basis points in the past year to a record 8.3 per cent. That compares with 3 per cent on corporate notes of all grades globally, according to Bank of America Merrill Lynch indices.

Aggregate financing, the broadest measure of new credit, climbed 14 per cent to 16.1 trillion yuan in the first 11 months of last year from the same period in 2012, central bank data shows.

The debt of publicly traded companies on the mainland and in Hong Kong has surged to the equivalent of US$1.92 trillion from US$607 billion at the end of 2007, data shows.

"If credit continues to grow at such a rapid pace, then what China faces is either a financial crisis or a bust, in which flows of credit will be disrupted and the trend of growth will be sharply reduced," said Tom Byrne, head of the sovereign risk group in Asia at Moody's Investors Service.

The seven-day repurchase rate, a gauge of interbank funding availability, has averaged 4.7 per cent this month, the second highest since June, according to a daily fixing rate announced by the National Interbank Funding Centre.

A total of 31.2 billion yuan of planned bond offerings were scrapped or delayed since the start of last month.

Aluminum Corp of China, the nation's biggest producer of the metal, last week postponed a 2 billion yuan note sale, according to a statement on the Chinamoney website.

The People's Bank of China suspended reverse-repurchase agreements, which it uses to inject money into financial markets, for almost three weeks in December, the longest pause since July.

"It's a deleveraging campaign led by the central bank," said Shi Lei, the head of fixed-income research at Ping An Securities. "If monetary policy remains tight, it will result in more debt defaults, starting from private enterprises or regional state-owned companies."