Road to stagnation? China Inc gets a break from lenders

Tue Oct 4, 2016 6:19am EDT
 
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By Umesh Desai

HONG KONG (Reuters) - 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 $18 trillion in debt, equivalent to about 169 percent 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 U.S. 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   Continued...

 
Buildings are seen at the Yujiapu financial centre, in Tianjin, China February 22, 2016.    REUTERS/Jason Lee/File Photo