China Daily Global Edition (USA)
Debt default controlled by prudent policy
Prudent monetary policy, market discipline help rein in runaway corporate debt
These days, creditors to Chinese companies are optimistic.
Analysts attributed the optimism to the light of monetary policy at the end of the dark, seemingly endless tunnel of corporate debt, as the total outstanding debt financing instruments reached 9.19 trillion yuan ($1.39 trillion)
Fears of corporate debt defaults that bedevilled market sentiment for long, are receding. What’s more, economic fundamentals appear rock solid — Chinese GDP, which expanded 6.9 percent in 2017 to 82.71 trillion yuan, is forecast to grow by 6.6 percent to 6.8 percent this year — despite trade tariff tensions and currency and stock-market fluctuations.
Effective implementation of a prudent and neutral monetary policy, marked by regulatory tightening and steady progress in deleveraging, is helping minimize default risk related to ballooning corporate debt. And big fat corporate profits are raising hopes of some debt repayments, which would not only reassure creditors but brighten investor mood, analysts said.
The National Association of Financial Market Institutional Investors, an organization that helps the interbank bond market to regulate itself, said in a note earlier this month that there were no new defaults among non-financial enterprises in June, indicating that credit risk of debt financing instruments is “generally under control”.
Central bank data indicated that by the end of May, outstanding repayments related to corporate credit bonds that had already defaulted stood at 66.3 billion yuan, accounting for just 0.39 percent of the total value of outstanding bonds.
Pan Gongsheng, deputy governor of the People’s Bank of China, the central bank, said, “The overall risk in the bond market is under control. Though some default cases have occurred, the new defaults are sporadically distributed instead of demonstrating a risk concentration, reflecting the effects of stronger market discipline and orderly unwinding of implicit repayment guarantees. The bond default rate remains low in general.”
Agreed Brian Coulton, chief economist at Fitch Ratings, the global ratings agency. “There has doubtless been some good progress made of late towards stabilizing corporate debt.”
In its annual economic report for 2017 published on June 24, the Bank for International Settlements or BIS stat- ed that China’s overall creditto-GDP ratio index, after a very rapid increase, peaked at the beginning of last year.
“In particular, credit to the corporate sector fell sharply as the authorities intensified measures to encourage deleveraging and reduce financial stability risks,” said the BIS annual report. “(And it signaled) that the financial cycle appears to have already turned.”
To control corporate debt expansion, the central bank had guided financial institutions to cut loans to industries suffering from overcapacity. As a result, banks cut back on loans to industries like iron, steel and coal.
China’s credit risk, however, is still concentrated in the corporate sector, compared with government debt and the household sector.
In 2017, the leverage ratio of the corporate sector in China was 159 percent, down 0.7 percentage point year-on-year. Leverage ratio is an indicator of how much capital comes in the form of debt or loans, and reflects the ability of a company, a sector or a government to meet its financial obligations.
It was the first drop in the corporate sector’s leverage ratio since 2011. The number had been increasing an average 8.3 percentage points annually between 2012 and 2016, according to PBOC data.
In contrast, by the end of last year, the leverage ratio of government debt was 36.2 percent, down 0.5 percentage point year-on-year, and that of the household sector was 55.1 percent, up 4 percentage points year-on-year, PBOC data showed.
After a flourishing credit cycle in the last decade, Chinese companies found themselves with over-expanded balance sheets. But this was in line with their radical expansion strategies.
However, the uncompetitive ones among them, given their structural defects, may struggle with refinancing when a large pile of their existing debt becomes due for repayment later this year.
In the third quarter — the July-September period — corporate debt valued at 1.37 trillion yuan will be due for repayment, according to Bloomberg data.
According to data from Wind Info, a market information provider, corporate bonds worth 98.82 billion yuan will expire in the third quarter, followed by a larger tranche worth 103.98 billion yuan in the fourth quarter.
If the companies concerned struggle to find refinancing in time, defaults may well occur, potentially besmirching corporate China’s reputation and raising fears about macroeco-
The overall risk in the bond market is under control ... The bond default rate remains low in general.” Pan Gongsheng, deputy governor of the People’s Bank of China