China credit strains rise as Beijing embraces failure

Sun Mar 23, 2014 5:19pm EDT
 
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By Umesh Desai and Gabriel Wildau

HONG KONG/SHANGHAI (Reuters) - Credit warning signs are flashing for heavily indebted Chinese semiconductor, software and commodities firms as the government cautiously steps aside to let market forces play a bigger role in deciding winners and losers.

China's first-ever domestic bond default this month - a missed interest payment from Shanghai Chaori Solar Energy Science and Technology Co (002506.SZ: Quote) - shattered the belief that Beijing would always bail out struggling companies.

"The Chaori default goes to show the government will begin to let the market decide the fate of weak borrowers," said Standard & Poor's analyst Christopher Lee in Hong Kong.

Lee said defaults would be "incremental but controlled" with sectors including shipbuilding, metals and mining, and materials among those showing the highest risk as China's economic growth slows and banks tighten lending.

Chinese companies owe just over $1 trillion in domestic bonds, of which 15.8 percent is coming due this year, Thomson Reuters data showed.

While companies contacted by Reuters were confident they could obtain credit, Chinese rating agencies have stepped up the pace of downgrades. There were 77 companies downgraded in 2013, more than triple the previous year's tally, according to ratings agency China Chengxin.

A Reuters analysis of more than 2,600 Chinese companies found credit metrics worsening across a range of industries. The software sector was shouldering the heaviest credit burden with an average of 3.4 times more debt than equity. Semiconductors - a category which includes solar companies such as Chaori - had a debt-to-equity ratio of 2.6.

Across all listed Chinese companies, the average debt-to-equity ratio was 0.85 in 2013, according to Standard Chartered.   Continued...

 
A woman counts Chinese yuan notes at a market in Beijing, July 1, 2013. REUTERS/Jason Lee