Road to stagnation?Lenders are offering support with debt rollovers to Chinese corporations, where corporate debt has risen sharply to 169% of GDP. China Inc gets a break from lenders 0 Profits at roughly a quarter of Chinese companies in a Reuters analysis were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.Corporate China sits on US$18 trillion (N$244.8 billion) in debt, equivalent to about 169% of China’s GDP, but few firms reported feeling the heat.
Instead, lenders are heeding Beijing’s call to support the real economy and so are rolling over company debt or granting repayment waivers, sometimes for years, specialist lawyers and investors said.
This is evidence that China may be in for a long period of Japan-like stagnation rather than a single event triggering a crisis - what some economists call a “Lehman moment” after the collapse of Lehman Brothers in 2008, which touched off the global financial crisis.
“They are kicking the can down the road for stability in the short term,” said Roland Mieth, Singapore-based emerging markets portfolio manager for US fund manager PIMCO.
“China can maintain status quo for many years to come, like Japan did with their leverage, without triggering a financial crisis.”
International institutions have warned China to stop financing weak firms, especially inefficient state-owned enterprises (SOEs), which tend to crowd out the private sector.
More defaults are needed, they say, to improve credit allocation and stop wasteful spending in the economy.
Credit Quality
But while China has recognised the need to wean its corporate sector off of cheap loans, Premier Li Keqiang has also promised credit would keep growing, and state-run banks have been urged to support small and medium enterprises (SMEs).
And banks are listening, say lawyers and investors, with companies given three or four years of grace, when they do not pay interest, or helped to restructure bonds at full value, essentially, rolling them over.
“Premier Li has asked banks to rollover loans, especially for SMEs. That’s a clear reason why bond defaults are coming down,” said brokerage CLSA’s head of China strategy, Francis Cheung.
“(Banks) have shifted focus from bad debt recognition to economy-supporting measures. Banks are giving more grace period and reporting more stable NPLs (non-performing loans), even after guiding earlier that these ratios will rise.”
Goldman Sachs estimated last week there was only one default in the domestic Chinese bond market in the past three months, compared with at least 10 in the first half of the year.
Of course, onshore defaults could and will still rise - rating agency S&P Global says the credit quality of about 240 Chinese companies it rates is deteriorating more quickly than at any time since 2009.
The muted default situation “is an aberration given the sharp deterioration in credit risks,” it said in a research note.