Time for Chinese companies to rethink their debt book, says JP Morgan

Chinese industrial and materials companies have taken on much more debt, especially the short-term variety, than their global peers while their earnings measure was also poorer, a JP Morgan study found.

However, new economy sector saw its leveraging ratio decline in the past five years, possibility reflecting insufficient use of leverage to drive growth.

Chinese companies have over 50 per cent more leverage than their global counterparts due to their rapid borrowings in the past five years, especially for firms in the industrial and materials sectors, the study said.

The median debt-to-ebidta ratio of Shanghai and Shenzhen listed firms, a measure to show how much debt a company uses to generate earnings, jumped from 2.6 times in 2011 to 3.2 times in 2015. That compared to a median of 2 times debt-to-ebitda ratio for firms in the S&P 500 index in New York, FTSE index in London and DAX index in Germany.

The study excluded firms in China’s property and financial sectors. Mainland property companies are considered to be highly leveraged.

Chinese firms covered in the study had a third or less of their debt in bonds, versus about 75 per cent for large German firms, and almost 90 per cent for large US and UK firms.

As a result, their debt is short-dated, with debt maturities of one to two years versus about