Chinese property developer Yida China is battling to avoid defaulting on its debt as the coronavirus pandemic slams sales, borrowing costs spiral and police detain a director on suspicion of embezzlement. Heavily indebted developers like Yida act as an early warning system for trouble in Asia’s financial system because their foreign-denominated debt is frequently traded and they are a large contributor to local government budgets in the world’s second-largest economy. Alarm bells are ringing as Asia’s financial system strains to fund struggling companies, from such small Chinese developers to Indonesian oil exporters and Singaporean airlines. As the International Monetary Fund predicts a global slump unmatched since the Great Depression, the region’s borrowers are queuing up for credit. Only the largest, safest names are confident of securing funds. “Despite the slow return to normalcy in mainland China, the sharp rise in Covid-19 cases in the rest of the Asia-Pacific is translating to an environment at least as challenging as the 1997-98 Asian financial crisis for borrowers,” said Terry Chan at credit ratings agency S&P Global Ratings. The bottom line is that a short-term cash shortfall is hardening into a solvency crisis for a growing cohort of zombie companies as the coronavirus pandemic stifles demand for their goods and services. Bailout packages vary dramatically, from India ’s relief measures equating to about 1 per cent of GDP to Japan ’s bazooka of roughly 20 per cent. The region’s bankers are struggling with the moral hazard of propping up deadbeat borrowers under pressure from governments and the public to protect jobs. “The companies that have a solvency problem, not just a liquidity problem, will find it harder to get access to finance once the government taps are turned off,” said Piyush Gupta, the CEO of regional bank DBS. He expects banker-bashing to reach a crescendo when government relief packages wind down and companies that are no longer viable go bankrupt because lenders refused to save them. The financial crisis has evolved swiftly. As demand slumped, missed payments snowballed along supply chains , leaving companies with less cash to cover costs. “The supply chain is a payments chain in reverse – so an abrupt halt in production can quickly lead to missed payments elsewhere,” said Zoltan Pozsar, an investment strategist at Credit Suisse who previously gathered market intelligence for the US Federal Reserve during the 2007-08 global financial crisis. Shortly afterwards, the equity and debt capital-raising machines of Hong Kong and Singapore all but ground to a halt as investors pulled a record US$55 billion from Asian emerging markets in March. The region’s companies, which were already grappling with fallout from the US-China trade war, face the spectre of a global financial shock and economic recession. Some companies, such as Singapore Airlines, have already taken the drastic step of launching highly dilutive equity rights issues to keep operations running. Investment bankers expect more emergency offerings, massive industry consolidation and a spike in debt-restructuring work. Cash-strapped Chinese conglomerate HNA hastily convened a teleconference on Tuesday with creditors to postpone paying the principal and interest on its 7-year bonds worth 1.15 billion yuan (US$163 million) due on April 15. The pandemic has exposed weaknesses in Asia’s financial system. Since the 1997-98 financial crash and the 2007-08 global financial crisis, the region’s financial plumbing has become more interwoven with the rest of the world, multiplying pathways for financial contagion. The IMF on Tuesday forecast that the global economy would shrink by 3 per cent this year as the deadly coronavirus plunged developed and emerging economies into recessions. “I’m watching for the rolling unintended and unexpected consequences of this financial crisis,” said Eric Solberg, chairman and chief executive of private investment firm EXS Capital Group, who has been buying and selling property companies in Asia since the 1990s. While Asia’s governments and banks have fatter capital buffers to ward off contagion and the region’s local currency markets have swollen since 2008, they are still susceptible to the sheer volume of debt in the system. China’s debt as a percentage of GDP, for instance, ballooned from early 1997 when it stood at 7.8 per cent, to 54.3 per cent late last year, according to the Institute of International Finance. Another channel for financial contagion is foreign direct investment (FDI). Chinese overseas direct investment has expanded from about 1 per cent of the global pie in the early 1990s to roughly 10 per cent, said the World Bank. The Middle Kingdom has financed power projects in Laos, real estate in Cambodia and mining in Mongolia. An early sign that China is cutting back on this largesse is mergers and acquisitions data, a major component of FDI. Chinese purchases in the rest of Asia slumped to US$1.3 billion during the first quarter of the year, the slowest quarter by value since early 2010 according to Refinitiv data. The drop is especially notable given that China’s economy has almost tripled in size over the past decade. To make ends meet, Asian borrowers rely more heavily on relationship banking, short-term and uncommitted lines of credit, than they do in the west where companies can tap deeper and more liquid capital markets. “To support clients requiring inventory management during this time, we are working with them to either provide extensions of tenors or, where required, incremental working capital facilities,” said Farhan Faruqui, head of ANZ’s institutional business outside Australia. Businesses are rapidly drawing down on dollar-denominated credit lines in the region, so much that bankers said they are punching their calculators every day to check credit exposures by division and by client. Bankers are conserving credit for their best clients, setting the bar high for new business. Governments are lowering the amount of capital they require banks to hold to keep capital flowing. Hong Kong’s de facto central bank, for example, cut the level of regulatory reserves by half, releasing HK$200 billion (US$26 billion). Still, regulators are not forcing banks to lend and banks are wary of taking on more bad debt. State-led rescue packages have bought the strongest companies time to recover but have kicked the can down the road for others. “The worst of the problems will surface down the road because of all the relief measures that the authorities are providing,” said DBS’s Gupta. He expects some pickup in non-performing loans and credit costs in the first half of this year, more in the second half, but with the full extent of the problem only becoming clear next year. Asian banks’ credit costs will spike by US$300 billion and non-performing assets will rise by US$600 billion in 2020, credit rating agency S&P Global Ratings forecast in a report on April 6. That leaves many companies in a bind. Chinese property developers, for instance, have around US$57.9 billion of onshore bonds and US$34.9 billion of offshore bonds coming due in the next 12 months, according to credit ratings agency Moody’s calculations. “Low-rated companies face a challenging time, especially if they need to refinance bonds this year … There will be more negative rating actions by rating agencies,” said Stan Ho, CEO at China-focused Lianhe Ratings Global. Fallen angels, once investment-grade companies relegated to junk bond status, are likely to multiply. A cascade of credit rating downgrades means even more expensive financing. Private investors are unlikely to step at scale. While private equity funds had US$1.46 trillion of dry powder as of June, according to Preqin, many funds are too busy helping existing portfolio companies. Those that have capital are discerning on price . “I see a lot of financial stress in the economy, in terms of cash flow management,” said Tony Zhang, a partner at private equity investor Jeneration Capital, who warned that companies looking to secure funds will have to be price-takers and prove that they can weather the storm. The small Chinese property developer, Yida, narrowly avoided default in March by swapping US$300 million of offshore debt for cash and new notes as well as extending a bank loan repayment. However, credit rating agencies downgraded its debt to deep junk and warned the risk it would not secure refinancing over the next 12 months is high.