In China, Greater Risks on Debts
MARCH 24, 2014
HONG KONG — Credit warning signs are flashing for heavily indebted Chinese semiconductor, software and commodities companies as Beijing cautiously steps aside to let market forces play a bigger role in deciding winners and losers.
China’s first domestic bond default this month — a missed interest payment by Shanghai Chaori Solar Energy Science and Technology Company — shattered the belief that Beijing would always bail out struggling companies.
“The Chaori default goes to show the government will begin to let the market decide the fate of weak borrowers,” said Christopher Lee, an analyst with the rating agency Standard & Poor’s in Hong Kong.
Mr. Lee said defaults would be “incremental but controlled” with sectors like shipbuilding, metals, mining and materials among those showing the highest risk as China’s economic growth slows and banks tighten lending.
Chinese companies owe just over $1 trillion in domestic bonds, of which 15.8 percent is coming due this year, Thomson Reuters data showed.
While companies contacted by Reuters were confident they could obtain credit, Chinese rating agencies have stepped up the pace of downgrades. There were 77 companies downgraded in 2013, more than triple the tally of 2012, according to China Chengxin, a credit rating agency.
A Reuters analysis of about 2,600 Chinese companies found credit metrics worsening across a range of industries. The software sector was shouldering the heaviest credit burden, with an average of 3.4 times more debt than equity. Semiconductors — a category that includes solar companies like Chaori — had a debt-to-equity ratio of 2.6.
Across all listed Chinese companies, the average debt-to-equity ratio was 0.85 in 2013, according to the bank Standard Chartered.
It is unclear where China’s government will draw the line on letting market forces prevail. Prime Minister Li Keqiang said in a news conference on March 13 that Beijing was “reluctant to see defaults of financial products but some cases are hard to avoid.”
But social stability has traditionally trumped market overhauls. If a major employer or a high-profile company were to slip into distress, the government is all but certain to intervene. The municipal government of Wuxi, for example, threw a $150 million lifeline to Suntech Power Holdings, a struggling solar company, in October.
Materials companies look vulnerable as weak commodity prices hurt profitability, leaving less money to repay debt. Although the metals and mining sector’s average debt-to-equity ratio is a manageable 1.4, bondholders see rising risk and have demanded higher yields for holding the debt.
Xinyu Iron and Steel Company, for example, would need almost 18 years to repay its total debt at the present rate of cash generation. Its bonds due 2016 saw yields rise 1.6 percentage points this month to about 10 percent.
Xinyu did not immediately respond to emails and a phone call seeking comment.
As a state-owned company, Xinyu is likely to get government help if it has problems repaying its debt. Indeed, if Beijing failed to step in when any state company faltered, that would set off louder alarm bells among creditors.
Nanjing Iron and Steel, a privately owned company that has 4 billion renminbi, or about $640 million, in bonds coming due in 2018, said it had many funding channels available, including American dollar debt, stock holdings and bank loans.
"The bond is due in 2018,” said Xi Siwei, an executive in the securities department at Nanjing Iron and Steel. “Our company has not made any repayment plan since the time has not arrived yet.”
Zhuhai Zhongfu Enterprise Company, a packaging materials company that has 590 million renminbi in bonds due in 2015 and an equal amount coming up for repayment in 2017, said the coming months were a boom season for its business and cash flow would pick up, easing debt-servicing strains. If necessary, it could also sell some assets.
Shandong Molong Petroleum Machinery Company, which owes 500 million renminbi in bonds due in 2016, said rising bond yields were of little concern because it had no plans to issue new debt and bank interest rates were not as high.
“The yield has nothing to do with our ability to repay the debts,” said Zhao Hongfeng, the company’s board secretary. ”We have no problem in repaying the short-term debts.”
Beijing will continue to support companies that fit its policy goals, which suggests large state-owned enterprises would be rescued if they got into debt trouble, said Steve Wang, head of China research at Reorient Group, a boutique investment bank based in Hong Kong.
“We will not see a big-bang collapse but rather small fire crackers in a ‘no pain, no gain’ process,” he said.
Other credit problems may be lurking in harder-to-read areas such as bank loans. News last week that Zhejiang Xingrun Real Estate Company, a Chinese property developer with 3.5 billion renminbi in debt, was close to insolvency highlighted that risk. About a third of its borrowings came from individual investors.
While the better known property developers have access to offshore markets, there may be more casualties among the smaller players.
“Banks in any case aren’t eager to provide loans and trust loans are under scrutiny, so the channels for smaller developers are limited,” said Manjesh Verma, head of credit research and strategy in Hong Kong at Crédit Agricole.
About 80 percent of China’s 60.3 trillion renminbi in total corporate debt comes from bank loans. Trust loans and microcredit account for 4.8 trillion.
China’s big banks favor large, state-connected firms, which leaves smaller companies more reliant on informal lending.
“Do we see more defaults in the near future?” said Mark Capstick, a fund manager at Fischer Francis Trees & Watts, an asset management firm in London. “Yes, with a move towards market-based pricing that is inevitable but, in the near term, the scale of defaults will be relatively small and this process will be managed throughout the process.”
Umesh Desai reported from Hong Kong and Gabriel Wildau from Shanghai. Both are Reuters correspondents.
A version of this article appears in print on March 25, 2014, in The International New York Times. Order Reprints|Today's Paper|Subscribe
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