China’s Corporate Deleveraging Campaign May Be Set Back by Years
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China’s corporate leverage is ramping up again, before borrowers had even finished working down the last surge.
The campaign by policy makers to rein in the growth of debt was just approaching the four-year mark when battling the coronavirus outbreak quickly replaced all other priorities. And it was showing results: nonfinancial corporate debt last year was noticeably, if marginally, down from a 2016 peak relative to the size of the economy.
For now, China has returned to the 2008 model of opening up the credit taps, especially through state-run enterprises and local governments. The new tack also means potentially more help for private firms that would otherwise have defaulted. Investors have applauded: yields on lower rated, local government financing vehicles have come down to 2016 lows.
“Beijing still has sufficient policy tools to avoid systemic financial risk, but a continued rise in the debt-to-GDP ratio is inevitable in coming quarters,” said Ting Lu, chief China economist at Nomura International HK Ltd. “The risk associated with a further debt buildup will be one of the key tasks Beijing needs to handle in the post-COVID-19 period.”
Policy makers’measured approach to offering economic aid — averting deep large-scale interest-rate cuts or Federal Reserve style massive asset purchases — suggests authorities remain wary of the long-term risk of a rapid debt buildup such as occurred after 2008.
China’s nonfinancial corporate debt accounted for 156.7% of the country’s gross domestic product as of the third quarter of last year, down from a peak of 162.8% in early 2016 but up sharply from 98% on the eve of the global financial crisis. It’s also well above the 74.2% for the U.S. or 101.9% for Japan, data compiled by the Institute of International Finance show.
Chinese companies have sold a combined 3.1 trillion yuan ($445 billion) of onshore bonds so far this year, up 12.5% from the total for the first quarter last year. March alone accounted for 1.6 trillion yuan by Friday morning, marking a monthly record.
The issuance boom came after China’s central bank flooded markets with cash and freed up more funds for banks to lend, pushing borrowing costs to a14-year low. Since the virus outbreak, regulators also haverelaxed rules to lower the threshold for bond sales and fast-tracked approvals for borrowers hard hit by or involved in the fight against the epidemic.
Many of these firms arestate-owned entities and local government investment arms responsible for building infrastructure projects.
Despite the surge in supply, the market has held up surprisingly well. Yields on three-year AAA rated onshore bonds, most of which are issued by state-run firms, and those on AA rated bonds sold by local government financing vehicles have both dropped to around 3%, the lowest since late 2016.
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As for private enterprises, which have born the brunt of China’s deleveraging campaign and account for the lion’s share of the record defaults in the country’s bond market, there may be something of a reprieve. At least for key borrowers, market players say.
“The key is to avoid liquidation — otherwise it would lead to business closures and job losses,” said Wang Ying, an analyst at Fitch Ratings.
Onshore bond defaults in China have clocked 26.8 billion yuan so far this year, down slightly from 29.8 billion yuan a year ago.
One of the advantages of the Chinese system is theflexibility that the government has, said Michael Taylor, an analyst at Moody’s Investors Service, pointing to the fact that much of the private companies’ debt load is owed to the state sector.
The Chinese government’s own relatively benign debt-to-GDP ratio of 38.6% also offers room to ensure financial stability, Taylor said. “The government will mobilize all resources.”
— With assistance by Hong Shen, Ina Zhou, Tongjian Dong, Miao Han, and Molly Dai
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