China’s bad loans worsening: S&P Global
(13 October 2016 – 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 (A$2.23 trillion) in capital to cover a likely surge in bad loans according to S&P Global.
The rating agency estimated the problem credit ratio at Chinese banks was 5.6 percent at the end of 2015. In a downside scenario of unabated credit growth, that ratio could worsen to 11-17 percent.
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.
The firm 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 percent of 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 (BIS) warned recently.
The IMF has warned China its credit growth is unsustainable, with corporate borrowers sitting on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP).
"We expect further deterioration in the credit strength of state owned enterprises as they continue with their debt-funded expansion," S&P Global's report said.
"High leverage in corporates will likely constrain investments and aggregate demand."
Privately owned companies in China were turning around as cost controls and reductions in capital expenditure had eased pressure on their cash flows, S&P Global's report said.
The finding highlights the contrast in performance versus state-owned enterprises (SOEs), which were struggling to cover debts according to a recent report from Reuters.
As a result, SOE's median leverage, at about 6 times as of the end of 2015, was about twice the level for private sector entities.
"The divergence in credit risks between SOEs and private sector companies will therefore continue to increase," it said.
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