China Corporate debt overshadows GDP

In recent months, investors have paid increasing attention to China’s mounting debt. In particular, the corporate sector faces debt levels that have reached significant highs, with outstanding volume in Q4 2016 equal to 164% of the country’s gross domestic product. Moreover, the expected slowdown of the Chinese economy and a downgrade of its sovereign debt rating by Moody’s further give reasons to pay attention to the region.

IG bonds dominate the Chinese market

The nation’s corporate debt coming due in the next 5 years totals $1.62tr (63.4% of the total outstanding amount of $2.56tr),1 with the largest amount maturing in 2019 ($416.5bn). This market mainly relies the Chinese yuan, which makes up 81.7% of outstanding debt volume. The remaining volume is spread across foreign currencies such as US dollars (16.0%) and Hong Kong dollars (1.7%).

A majority of corporate debt coming due consists of investment-grade (IG) bonds ($1.39tr), followed by non-IG loans ($109.5bn), non-IG bonds ($82.2bn), and finally IG loans ($37.7bn). Even though IG bonds clearly dominate the market, those that are domestically rated may bring more uncertainty and thus higher risk than their ratings imply.

Refinancing opportunities on the radar

Chinese industries with the most outstanding debt due in the next 5 years are construction ($403.4bn), real estate ($307.8bn), and utility ($166.3bn), with a combined 54.1% of volume. These industries have originated more than $1.42tr of debt since 2012, with annual growth averaging 30.9% year-on-year between 2012 and 2016. With more than $700bn in outstanding debt from just the top two sectors, Chinese corporates may be feeding a bubble that poses major risks—which would affect the companies’ ability to repay existing loans and raise new debt.

Nonetheless, the massive volume of outstanding Chinese debt still offers refinancing opportunities. Significant amounts maturing by 2021 on a company-parent level include government-owned State Grid Corp of China with $39.1bn (all IG bonds), and China State Construction Engineering with $16.6bn (primarily IG bonds). In addition, Hengda Real Estate Group has a $1.3bn bond maturing in 2019, alongside Longjitaihe Industry’s $1.4bn non-IG term loan.

1 Corporate debt excludes finance, government, and holding companies.

Data source: Dealogic, Bank for International Settlements (debt ratio), as of June 20, 2017