Debt fears for firms

Twice that of the U.S. at 160% GDP, China’s corporate debt dropped greatly within the past 5 years according to a review of 1,400 companies conducted by Thomson Reuters.

This debt mountain is going to climb an additional 77% to $ 28.8 trillion in the next 5 years.

Analysts are pointing out that corporate debt growth is significantly affected by the government’s interventionist policy; but until now Beijing has only worked towards supporting economic growth on a whole and did not take warranted steps to decrease the load on its corporate sector.

Interest rates have already been cut 4 times since November 2014, bank reserves have been reduced and limits have been removed from the amount of deposits which they can lend.

As for the manufacturers debts are dwarfing profits at an increasing pace. The Thomson Reuters study found that in 2010, materials companies’ debts were 2.8 times their core profits. The government may have manage to impose enough urgent measures to stop the stock market bubble from bursting, but its ineffective approach at managing corporate debt may bring it soon into a no-escape situation, crashing its market liberalization dreams before they have time to plant their feet into the ground. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit.

The government can only help companies secure more money through banks but paying that back depends on the performance of the companies. “Last year, we made profits thanks to the sale of CNR shares”, said Gao.

“Prices are declining and revenue is slowing, and in this environment you can not force too quick a deleverage – that would lead to a hard landing”, said Wang.

However, quantity is not the only problem. For this to work, inefficient corporations must be allowed to fail in favor of more efficient and innovative investments.

Policymakers have said they want market mechanisms to play a bigger role in credit pricing, but in practice have balked at the consequences, effectively bailing out companies in trouble, as it did previous year when state-backed Shanghai Chaori Solar Energy Science and Technology defaulted on a bond coupon payment.

Rapid debt growth, opacity of risk and pricing and very high debt to GDP are a hazardous combination, Standard & Poor’s said. The recent turbulence in the Chinese stock market has been controlled by the authorities with strict controls but corporate debt issue could cause another shock for the investors and management of companies in China.