Skin deep

China's Great Balance Sheet Play

Corporate balance sheets look healthier. Look closer.

China's debt problems are old news, but several analysts in Asia have been telling me that the world is ignoring the amount of equity that's been added to balance sheets of late. It's true -- if only it were that simple.

A string of share offerings, asset disposals and sales of bonds that convert into equity has pushed the median debt-to-equity ratio of publicly traded Chinese companies to the lowest level in almost a decade, according to data compiled by Bloomberg. 

Gearing Down?

The median Chinese listed company ended last year with the lowest debt-to-equity ratio in almost a decade

Source: Bloomberg

Before you celebrate, however, look a bit more deeply into the numbers. Much of the stuff that has been viewed as equity could be seen as debt, too. Issuance of convertible bonds, which pay fixed coupons and may be transformed into shares at a certain level, increased last year after a pause from a record streak in 2013 and 2014. While those securities sit further down the line for payment if a company is liquidated, they still require regular payments and therefore increase gearing.

Kind of Equity

After dropping in 2015, issuance of bonds that may be converted into shares picked up last year

Source: Bloomberg

Also underlying the improvement are preferred stock or perpetual bonds, which accountants and banks consider equity. Those securities, however, also pay fixed yearly amounts and thus add to gearing. Some varieties have clauses that could force the issuer to redeem them in a few years, just like a normal debt security. And never before have Chinese companies had so much of those out there.

Debt Stock

In five years, the amount of preferred shares sold by the 4,382 listed Chinese companies increased more than 36 times

Source: Bloomberg

The result has been that the ratio of debt to common equity, a measure that shows what really is left for shareholders after all creditors are paid, remains very high -- even though it has dropped from the peak reached in 2014.

Mortgaged Up

On average, Chinese listed companies have more debt than equity

Source: Bloomberg

But that measure only considers traditional borrowings. If preferred stock is added to debt and divided by common equity, things look a lot more worrying: There's on average $1.65 in obligations that pay fixed coupons for every $1 of shares in Chinese companies.

Real Picture

The average listed Chinese company owes $1.65 for every dollar of shares outstanding

Source: Bloomberg

So, yes, China's listed companies are aware of their debt problem and are doing something about it. As with many other things in China, though, they're adorning the issue instead of addressing it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at clangner@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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