China's $12 trillion corporate debt pushes up refunding costs, drives mergers

Tue Feb 25, 2014 4:22am EST
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By Matthew Miller and Umesh Desai

BEIJING/HONG KONG (Reuters) - China's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120 percent of GDP - according to Standard & Poor's estimates.

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

While a credit crisis isn't expected anytime soon, analysts say companies in China's most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor's Rating Services in Hong Kong. "Borrowing costs already are going up due to tightened liquidity," he said. "There will be a greater differentiation and discrimination of risk and lending going forward."

China rarely allows corporate failures, particularly of state-backed companies, partly out of fear that widespread layoffs could lead to social unrest. In cases where firms have effectively gone bankrupt, domestic bondholders tend to be paid off ahead of other debtors.


China Erzhong Group (Deyang) Heavy Industries Co 601268.SS, a loss-making manufacturer of equipment for the steel and power industries, faces higher borrowing costs after a wholesale restructuring, said Huang Guozhan, an executive at the company's board secretary's office.   Continued...

A customer walks with a child inside a wholesale retailer store in Beijing December 4, 2010. REUTERS/Petar Kujundzic