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China’s Credit Party Winds Down in Headwind for GDP Growth

Updated on
  • Net issuance drops 39% in August as cutting debt trumps growth
  • Decline shows ‘beginning of deleveraging process,’ Xia Le says

Chinese companies’ borrowing costs have never been so low. That’s little consolation to firms cutting debt rather than investing amid a slowing economy.

The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. Net issuance since March 31 has slowed to 496 billion yuan after a record 810 billion yuan in the first quarter of 2016. Yields on AA+ and AA rated five-year securities dropped to record lows this month.

The decline in bond financing and the lowest fixed-asset investment growth since 1999 suggest central bank monetary easing will have trouble reviving growth that’s forecast to slow through next year. China must balance cutting corporate debt, which more than doubled in five years to 111.7 trillion yuan at the end of 2015, with steps to revive the world’s second-biggest economy.

“Firms are adjusting their balance sheets by slowing further investments and hoarding cash because they see more uncertainty with economic growth,” said Xia Le, chief Asia economist in Hong Kong at Banco Bilbao Vizcaya Argentaria SA. “For the aggregate economy, it means slower growth because fewer companies are expanding.”

China’s fixed-asset investment climbed 8.1 percent in the first seven months of this year, amid the weakest economic growth in a quarter century, official data showed this month. Chinese firms reported a 10.2 percent jump in cash holdings during their latest quarter to a record high 7.33 trillion yuan, according to Bloomberg-compiled data.

There are mixed signals for the health of China Inc. The market-weighted total debt-to-equity ratio for onshore publicly traded non-financial companies was 73 percent as of March 31, compared with 89 percent a year ago, Bloomberg-compiled data show. Even so, their median ratio of earnings to interest expense has declined to 1.8 times from 7 times five years ago.

“With earlier stimulus on property and infrastructure petering out, credit demand from the real economy has moderated,” said Harrison Hu, China economist in Hong Kong at Royal Bank of Scotland Group Plc. The falling net bond sales “don’t necessarily mean that Chinese companies are deleveraging. It’s just that another credit party has peaked and waned.”

The average yield of five-year AA rated corporate debt has slumped 63 basis points this year to 3.73 percent. It touched a record low of 3.64 percent on Aug. 15. The rate on similar-maturity AA+ securities was also at record low of 3.39 percent on the same day.
Investors are avoiding notes issued by companies in industries with excess capacity after 18 notes defaulted in the broader onshore market this year, compared with seven for all of 2015. 

Chinese metals, mining and coal firms have sold 88.2 billion yuan of bonds in August, compared with 94.2 billion yuan of debt redemption in the industries, the fifth month in which issuance has failed to cover maturing notes.

“While good companies don’t have motivation to sell bonds as investment growth slows, bad companies have difficulty selling because of investors’ concern about credit risks,” said Tang Yue, a bond analyst at Industrial Securities Co. in Shanghai. “It may be hard for net bond issuance to rebound because the economy is still decelerating and credit risks are still high.”

— With assistance by Lianting Tu, and Judy Chen

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