Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults and adding pressure on policymakers to keep financing costs low.
The amount of loans, bonds and shadow finance arranged to cover interest payments are to probably rise 5 percent this year to a record 7.6 trillion yuan (US$1.2 trillion), according to Beijing-based Hua Chuang Securities Co (北京華創證券), whose lead fixed-income analyst was top-ranked by China’s New Fortune magazine in 2012 and 2013.
Dubbed “Ponzi finance” by Hyman Minsky, the use of borrowed funds to repay interest was seen by the late US economist as an unsustainable form of credit growth that could precipitate financial crises.
Chinese companies are struggling to generate the cash flow needed to service their obligations as economic growth slows to the weakest pace in 25 years and corporate profits shrink.
While the debt burden has been eased by six central bank interest-rate cuts in 12 months and a tumble in corporate borrowing costs to five-year lows, the number of defaults in China’s onshore corporate bond market has increased to six this year from just one last year.
“Some Chinese firms have entered the Ponzi stage because return on investment has come down very fast,” said Shi Lei (石磊), the Beijing-based head of fixed-income research at Ping An Securities Co, a unit of the nation’s second-biggest insurance company, Ping An Insurance (Group) Co (平安保險). “As a result, leverage would be rising and zombie companies increasing.”
China Shanshui Cement Group Ltd became the latest company to default on yuan-denominated domestic notes last week as overcapacity in the industry hurt profits and a shareholder dispute stymied financing.
State-owned steelmaker Sinosteel Co, which pushed back an interest payment on a bond last month, postponed it again this week.
Metrics of corporate health in Asia’s largest economy have deteriorated as growth slowed. The number of Shanghai and Shenzhen-listed companies that have less cash than short-term debt, net losses and contracting revenue has increased to 200 as of June from 115 in the year-earlier period, according to data compiled by Bloomberg.
Total debt at listed companies has climbed to 141 percent of common equity, based on a market-capitalization weighted average, the highest level in three years.
While the total amount of debt issued to pay interest is projected by Hua Chuang Securities to increase, it is taking up a smaller portion of overall new credit.
The firm predicts such borrowing is to account for 45 percent of new total social financing — which includes bank loans, shadow banking credit and corporate bonds — down from 50 percent last year, according to a Nov. 4 report.
Plunging borrowing costs have made it less expensive for Chinese companies to gain access to cash.
The rate on five-year corporate debt with “AAA” ratings dropped to a five-year low of 3.69 percent on Oct. 29 and was last at 3.95 percent.
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