Credit profiles of China’s top firms to worsen: S&P

HONG KONG: Rising debt levels will worsen the credit profiles of China’s top 200 companies this year, requiring the country’s banks to raise US$1.7 trillion (RM7 trillion) in capital to cover a likely surge in bad loans, S&P Global said in reports published yesterday.

The study sees little scope for improvement in 2017 amid worsening leverage and substantial excess capacity in almost all sectors. Seventy percent of the companies surveyed were state owned, comprising 90% of the sample companies’ debt.

S&P estimated the problem credit ratio at Chinese banks was 5.6% at the end of 2015. In a downside scenario of unabated credit growth, that ratio could worsen to 11-17%.

In such a situation, banks would need as much as US$1.7 trillion in recapitalisation funds by 2020. Even under a base-case scenario, they would require US$500 billion.

S&P expects China’s government to continue to allow rapid credit growth over the next 12-18 months before attempting to rein it in, implying that risks would heighten in one to two years’ time.

Debt has emerged as one of China’s biggest challenges, with the country’s total debt load rising to 250% of gross domestic product (GDP).

Excessive credit growth in China is signalling an increasing risk of a banking crisis in the next three years, the Bank of International Settlements warned recently.

The International Monetary Fund has warned China its credit growth is unsustainable, with corporate borrowers sitting on US$18 trillion in debt, equivalent to about 169% of GDP. – Reuters