Tripling in Debt to $1.7 Trillion Drags on Economy
Chinese companies are spending more than ever to service debt after their borrowing almost tripled over five years, prompting strategists to warn of rising default risk and a threat to economic growth.
Total short- and long-term borrowing by 3,895 publicly traded non-financial companies rose to almost $1.7 trillion in their latest filings, from $604 billion at the end of 2007, data compiled by Bloomberg show. Financing costs, including interest, on all forms of debt climbed to the highest level as a percentage of gross domestic product last year, according to Sanford C. Bernstein & Co.
Bernstein says that means less cash for investment to fuel the world’s second-largest economy, while Royal Bank of Scotland Group Plc says the threat of defaults will hold back interest-rate liberalization. The average 10-year yield for top-rated company bonds is near a 13-month high at 5.27 percent, compared with the 2.6 percent yield in a Bank of America Merrill Lynch global corporate index.
“There’s just a lot more debt in China today than there was really ever in the past, relative to nominal GDP,” said Mike Werner, a Hong Kong-based analyst at Bernstein. “More and more of the country’s resources have to be put to just financing outstanding debt, and that itself is a headwind for economic growth.”
While the nation exited a seven-quarter slowdown in October-December as the government eased monetary policy, incoming Premier Li Keqiang may need to confront the fading effects of government support, a likely pickup in inflation and rising risks from shadow banking. Price growth accelerated to a seven-month high in December, driving up benchmark bond yields. GDP grew 7.8 percent in 2012, the slowest in 13 years.
Chinese banks doled out 8.2 trillion yuan ($1.3 trillion) of new loans in 2012, 10 percent up from a year earlier and the second-highest level on record, central bank data show. The government quota for new lending may be set at 9 trillion yuan this year, Caixin reported on Jan. 22.
A 17.6 trillion-yuan binge of stimulus lending in 2009-2010 stoked inflation, weakened banks’ financial buffers and lead to an increase in non-performing loans.
Since then, China’s economy has become a “credit junkie, requiring increasing amounts of debt to generate the same unit of growth,” analysts Edward Chancellor and Mike Connelly at investment firm GMO LLC, which managed $104 billion as of Sept. 30, wrote in a research note this month.
Total credit in the economy, including items off bank balance sheets, climbed to about 190 percent of GDP by the end of 2012, up from 124 percent in 2008, Fitch estimated this month. The burden may need government resources to resolve, harming China’s credit outlook, the ratings company said.
“The 2009 stimulus was hailed in its day as one of China’s greatest historic successes,” said Drew Brick, head of Asia-Pacific markets strategy in Singapore at RBS. “Instead it may well represent one of the most severe risks to face the Communist Party in a generation.”
China’s total social financing, which includes bank loans, bond and equity sales, trust loans, entrusted loans and bankers’ acceptance bills, surged 23 percent to 15.8 trillion yuan last year. A record share of that came from non-bank credit, highlighting the growth of so-called shadow banking activities that have prompted warnings of rising credit risks.
Only 29 percent of last year’s aggregate financing was translated into economic growth, the lowest on record, according to Bernstein’s Werner. For the real economy to expand at 8 percent this year, growth in non-loan credit would have to accelerate to 33 percent from 25 percent in 2012 if the credit-to-GDP efficiency remains at last year’s level, he said.
“You could see some of this as a result of borrowing to repay old debt, you could say this is borrowing to be put into more speculative activities rather than being put into real investment for the economy,” Werner said.
Even as the central bank cut interest rates twice last year, borrowing costs on total social financing were the equivalent of 14.3 percent of China’s nominal GDP in 2012, up from 14.2 percent in 2011 and above the average of 10.1 percent in 2002-2010, according to Bernstein.
Total social financing may reach 16.5 trillion to 17.5 trillion yuan this year, Bank of Communications Co., China’s fifth-largest lender, forecast last week.
China’s markets are painting an optimistic picture for the overall economy. The benchmark 10-year government bond yield was little changed last week at 3.59 percent, rising from a two-year low of 3.24 percent in July.
Five-year credit-default swaps protecting against non-payment on China’s sovereign debt fell two basis points to 63 last week, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The yuan was little changed today at 6.2232 per dollar in Shanghai, after touching a 19-year high of 6.2124 on Jan. 14.
“It’s too early to tell where the bond yields will head this year because we saw mixed signals,” said Liu Xiaochang, a Nanjing-based fixed-income analyst at Huatai Securities Co. “Liquidity is abundant, inflation is picking up, but whether the economy is on a solid track to recovery is unknown.”
The average debt of the listed companies is 4.1 times earnings before interest, tax, depreciation and amortization, up from 2.2 times five years ago, data compiled by Bloomberg show. That’s lower than the 6 times for the world’s top 500 companies.
The likelihood of the nation’s first bond default is higher in 2013, according to the annual report of China Central Depository & Clearing Co. published Jan. 6. There is pressure on yields to climb and bonds issued by small-and medium-sized companies accounted for 9.1 trillion yuan of the 26 trillion yuan of outstanding debt at the end of 2012, it said.
The yield on 10-year corporate debt rated AA- is 7.50 percent, up from July’s 18-month low of 7.23 percent, according to Chinabond, the nation’s biggest debt clearing house.
“High-yield bonds are at more risk this year,” said Gao Qi, a vice president of the Asia-Pacific market strategy team for RBS in Singapore.
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