China’s Company Debt Soars US$12 Trillion Has Hidden Economy Risks China’s financial debt has continuously hit record levels. Reuters reported that at the end of last year, Chinese non-financial companies, held a total debt of about US$12 trillion. (72 Trillion yuan) It equals to over 120% of GDP ( Gross Domestic Product). What’s the cause of the high debt? And what does it reflect in the current economic status? This year is a peak year for companies to repay their debt, Will a large default possibly occur? Let’s take a look. Standard & Poor’s (S&P), estimates that growth in Chinese company’s debt, has been unprecedented. At the end of last year, Chinese non-financial companies held a total outstanding of bank borrowing and bond debt, of about US$12 trillion. It equals to over 120 percent of GDP. non-financial firms, showed total debts have soared by more than 260 percent between December 2008 and September 2013. The amounts increased from 1.82 trillion yuan (US$294.4 billion) to 4.74 trillion yuan (US$777.3 billion). Xie Tian, Professor at Aiken Business School, University of South Carolina: “Thomson Reuters’s report says, total debt has increased by 260 percent. It is a big shock for outsiders, as we don’t know how and by which way it suddenly rose so rapidly? Or has it always been this much? Yet we figure, the outside world has no knowledge of it.” Xie Tian believes that the scale of Chinese corporate debt growth is the same as other debt - be it public debt, governmental debt, private debt, etc. They have always been opaque. If the figure is reliable, it indicates that the governmental and the company’s debt have reached very serious levels. Gong Shengli, a leading researcher of financial intelligence in Beijing, says that from the central to local regime, and to seventh level of management, they operated the company in a low quality environment, it is one of the reasons to have caused the growth of Chinese company’s debts. Gong Shengli: “The seventh level of management is a double structure: government and the Communist Party. It’s caused high cost in the operations of economy, companies, logistics and resources. It also includes capital running, bank operation and currency engagement. They are all paying a very high cost.” “Thomas Reuters data shows, China’s power producers and construction materials firms, are among the most highly levered in the world’s second-largest economy.” “With each Sector reporting twice as much debt as equity by the end of September.” The recently released 2013 China Top 500 Enterprises Report, shows 500 firms represent China’s enterprises with high leverage. Obviously it is in an unsustainable state. The report points out that such a high leverage model is very dangerous. Xie Tian says that the company’s debt is too high, and also the leverage ratio has increased. If the economy is growing fast, it is not a problem, it will be of benefit to any company’s expansion and development. Xie Tian: “However, China’s company is not really operated and based on risk status, neither is it independent. It is controlled by the government. When it needs investment or the expanding of funds, it doesn’t follow the marketing rule or market’s demands. But to follow orders from leaders and local government, or to follow the false GDP provided by the Communist officials.” According to Reuters’ report, Christopher Lee, managing director of S&P (Standard and Poor), says that exacerbating China’s corporate troubles, has been the questionable use of four trillion yuan in stimulus, following the global financial crisis in 2008. Gong Shengli: “China’s economy is now driven by the money supply. Without an injection of money, the growth of 7% GDP cannot be achieved. Thus China’s investment is indeed very troublesome: The amounts of money being injected is the largest, which faces the inflation and devaluation issues. So a great amount of injection would also be a disaster.” Early this year, National Development and Reform Commission, said this year is a peak year to repay the debt. It is estimated that 100 billion yuan of city bonds needs to be paid back. Although analysts say China won’t break out of credit crisis in a short term. Some state-run enterprises with heavy financial leverage are being sold of its assets, or they are merging with other companies to avoid defaulting the debt on its own. Christopher Lee says that there will more defaults appearing. Due to tightened liquidity and of lending going forward. Following the US Fed QE’s reduction, the hot money has gradually moved out from China, which has increased the difficulty for companies to lend the money to repay the old debt, thus the defaulting risks are even greater.
Posted on: Tue, 04 Mar 2014 07:28:42 +0000
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