Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

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