China’s debt-cutting efforts are sinking private companies, while debt-ridden state firms float on
Of the seven companies that experienced their first bond default this year, six were privately owned, ratings agency says
Beijing should focus its debt-reduction efforts on state-owned firms and local governments, but the biggest loser to date of the deleveraging process has been the private sector, a Chinese ratings agency said on Tuesday.
In the first five months of the year, 13 companies defaulted on about 20 bonds worth a combined 14.8 billion yuan (US$2.3 billion). Both the number of defaults and their combined value were significantly higher then the corresponding figures for the same period of last year.
Of the seven companies that experienced their first (onshore) bond default in the period, six were privately owned, according to Zhou Hao, president of China Chengxin International Credit Rating Co, a joint venture with Moody’s.
A growing number of private firms could face cash flow problems in the second half of the year as they are the most vulnerable to the government’s crackdown on shadow banking, he told a conference in Beijing.
“It is the private firms that are mainly affected in this round of the deleveraging campaign.”
According to China Chengxin’s figures, private firms raised 275.4 billion yuan from bond sales in the January-May period. Of the total, about 260 billion yuan was used to repay debts, leaving a relatively small net financing figure.
In comparison, according to data from China’s central bank, across both the private and public sectors, the total net financing from corporate bond sales in the January-April period was 915.9 billion yuan, while the full-year total for 2017 was 442 billion yuan.
Also, outside the rust belt province of Liaoning in China’s northeast, very few state-owned enterprises reported defaults in the period.
Even Tianijn Real Estate Group, a developer backed by the Tianjin government, last month escaped defaulting on a 200 million yuan bond despite having debts of 180 billion yuan and a debt-to-equity ratio of 85 per cent.
Financial deleveraging was one of key goals outlined in President Xi Jinping’s supply-side structural reform plan launched in 2015. And at the Central Economic Work Conference in December, officials agreed that the country’s debt-to-GDP ratio should be used as the key measure of leverage.
According to the Bank for International Settlements, as of September, China’s debt was 256 per cent of its gross domestic product, up slightly from a year earlier.
Yan Yan, the chairman of CCXI International, said that the government should target its deleveraging efforts at state-owned firms and local governments. In contrast, the “leverage of private firms should be moderately increased”, he said.
The debt-to-equity ratio for China’s corporate sector as a whole is about 160 per cent, according to the latest figures, much higher than in the United States, Germany and Japan. Of China’s total value of corporate debt, state-owned firms account for more than 70 per cent.
Yan said also that many implicit government liabilities were buried within state firms and financing vehicles.
If local governments were to add up all the debts of their financing vehicles, their liabilities in public-private partnership projects, and supplementary lending through policy banks, the total could be as high as 50 trillion yuan, which is far above the official figure of 16.6 trillion yuan released by the finance ministry, Yan said.
While Beijing has washed its hands of any liability for local authority debts – citing the new budget law that took effect in 2015 – it has been cracking down on illegal borrowing by regional and district governments.
But Yan warned that rushing to deleverage could generate more problems.
“The authorities must exercise caution in their efforts to reduce risk,” he said. “The actual leverage could increase if it weighed on the economy.”
Another factor affecting Beijing’s efforts to cut risk was the ongoing trade dispute with the US, according to Marie Diron, managing director of Moody’s Sovereign Risk Group.
The row was “highly disruptive” and adding to the downward pressure on the economy caused by the government’s deleveraging efforts.
In an effort to allay some of the market’s concerns, the People’s Bank of China has fine-tuned its market liquidity tools. In April, it slashed the reserve requirement ratio for banks by 100 basis points, which released hundreds of billion yuan into the system.
Furthermore, on Friday, it introduced a new rule that allows banks to use higher rated corporate bonds as collateral against medium-term lending from the PBOC.
“It’s an easing of monetary stance,” Diron said. “The deleveraging can’t be too fast paced, because policymakers are mindful of the consequences.”