- Ten defaulted bonds in 2016 have a tenor of one year or less
- Some 47% of notes sold in 2016 mature in 12 months or sooner
Time is running out for Chinese companies addicted to short-term debt.
About 47 percent of the 4.3 trillion yuan ($654 billion) of local-currency bonds sold by Chinese non-banking companies in 2016 mature in one year or less, data compiled by Bloomberg show. Ten out of the 17 onshore notes that defaulted this year have such short maturities, compared with one out of seven in the whole of 2015. As banks try to keep zombie companies alive, short-term liabilities including loans account for 86 percent of the total versus 40 percent globally, a Natixis analysis of the 3,000 biggest listed companies in China shows.
“The frequent deadlines of short-term bonds are giving investors a big headache,” said Qiu Xinhong, a Shenzhen-based money manager at First State Cinda Fund Management Co., which oversees 10.9 billion yuan of assets. “There are so many troubled companies relying on new short-term borrowings to roll over debt or even to repay interest.”
Chinese companies repaying existing obligations by issuing new securities has never been such a big threat to the world’s second-biggest economy as a record 1.1 trillion yuan of notes of one year or less mature from July to September, Bloomberg-compiled data show. A bond-market rout in April caused sales of 12-month commercial paper to slump to a four-year low of 170.5 billion yuan this quarter. Chinese companies have scrapped or delayed sales of 117.3 billion yuan of notes with tenors of one year or less.
“Many bond issuers in China are Ponzi borrowers which rely on new debt to repay old interest,” He Xuanlai, a credit analyst at Commerzbank AG in Singapore. “Given that the door of refinancing is virtually shut for those who have weak credit profile, we will see further volatility, and eventually more defaults dominated by bonds with tenors of one year or less.”
Chinese banks, the biggest investors in the market, have strong demand for short-term bonds to match clients’ savings on their balance sheets, He said. The ratio of bonds with maturities of one year or less over all sales was down slightly from the 51 percent in 2015 and 2014, according to Bloomberg data. A press officer at the National Association of Financial Market Institutional Investors, which regulates short-term bonds in China, wouldn’t immediately comment on Bloomberg’s questions over phone on whether it is concerned.
Heavy reliance on short-term debt “is of course a liquidity risk for banks as well as a funding risk for debtors,” said Alicia Garcia Herrero, chief economist, Asia Pacific at Natixis.
The Natixis report released May 6 concluded that China Inc. is less indebted and yet at the same time more vulnerable than its global peer group. The Chinese companies have total liabilities that average 86 percent of common equity, versus 152 percent for the 3,000 biggest companies in the rest of the world. Yet their earnings cover interest expenses by just five times, versus eight times for global peers.
In the most recent default case, Sichuan Coal Industry Group, a coal miner based in the southwestern province of Sichuan, failed to repay 1 billion yuan of one-year bonds on June 15. Other companies are living day to day. Shipping firm Wuhan Guoyu Logistics Industry Group Co. said on June 13 it had used debt proceeds originally planned for a bank loan payment, to repay 200 million yuan of one-year notes due in November 2015.
Investors, who normally favor shorter-debt as less risky, are favoring longer-dated securities at lower ratings. Seven-year AA- rated bonds had a record yield discount versus similar-rated one-year notes of 87 basis points on May 27. The gap was 81 basis points on Tuesday. First State Cinda’s Qiu said he avoids issuers that have sold a lot of short-term bonds, seeing it as a symptom of weak credit quality.
“If at some point, they can’t sell new bonds any more, they will default,” he said.
— With assistance by Judy Chen