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Amid mounting Chinese debt, insolvencies and bankruptcies are set to continue in the Mainland and neighbours heavily exposed to its markets.

It was announced this week that China’s total debt had risen to 237% of GDP, Financial Times research shows, with analysts warning that there could be a financial disaster in the making. The newspaper estimates that by the end of March, domestic and foreign borrowing stood at Rmb163tn, or US$25tn.

This figure has risen from 148% in 2007 and while some believe that China has the foreign reserves to back the debt up, the case is worrying. Corporate debt is 160% of GDP according to the IMF, while the fund estimates that commercial loans potentially at risk of default represent 15% of the total.

It now takes on average 70 days for Chinese companies to get paid, a 14-year high. Trade credit insurer Euler Hermes, using data seen by GTR, has predicted rising corporate bankruptcies of 20% in China this year. While that figure is down from 24% in 2015, it is, again, a concerning development.

The impact on trade sensitive markets will be great: Euler Hermes has downgraded its country risk level for Singapore, Hong Kong and Taiwan, three of the markets most heavily exposed to Chinese defaults.

While this is predicted to be the first year since 2008 that corporate insolvencies didn’t rise on a global level, it is the second year in succession that they will rise in Asia. Before 2014, there had been declining defaults, since the financial crisis.

Euler Hermes predicts a 13% rise in Asia Pacific bankruptcies. Australia, which last year had the third-highest level of insolvencies growth after China (24%) and Taiwan (23%), will experience a much more encouraging 2016 with a 12% rise.

In large part, this will be in the resources sector. While larger miners and producers have been able to continue to borrow and bring more minerals online, smaller companies have struggled to meet costs. Many mines are now dormant, viewed unsaleable, while companies still have to pay taxes on local infrastructure that was constructed to support the mines, even if they don’t produce.

“They [securitisation and debt-equity conversions] are not solutions per se and could backfire,” IMF report

China has been seeking ways in which to deal with its non-performing loans, which some estimate to be as high as 34% of all Chinese debt – public or commercial. One of the main strategies has been to try to convert NPLS into equity by taking stakes in over-leveraged banks, another has been securitising them for sale on the debt markets.

However, demand for these packages is thought to be low, and the IMF’s China mission has advised Beijing against pursuing such measures. On the debt-equity conversion programme, the IMF writes that “they are not solutions per se and could backfire”.

It adds: “They could allow weak/nonviable firms to keep going as conversions reduce firms’ debt and borrowing costs. Banks may also not have the incentives to proactively restructure the firms, especially if they are minority shareholders and both banks and the firms are state-owned.

In the case of securitisation, which would allow highly-leveraged balance sheets to divest quickly, the IMF lists the following warnings:

(1) may make debts harder to restructure (as they are not converted into equity, need to deal with many creditors, unclear insolvency framework, possible political “capture” of new creditors)

(2) lack of depth in domestic institutional investor base (though existing and newly-created provincial AMCs may play a role)

(3) difficult to create a viable securitisation market (requires good supporting legislation and well-aligned market incentives)

(4) may transfer risk outside regulated financial sector to entities less able to absorb losses.

 


2015		 Forecast
2016
EH GLOBAL INSOLVENCY INDEX * -6% 2%
EH Asia-Pacific Insolvency Index 14% 13%
Australia 22% 12%
China 24% 20%
Hong Kong 13% 15%
Japan -9% 0%
Singapore 17% 15%
South Korea -14% 0%
Taiwan 23% 17%

Source: Euler Hermes