HONG KONG Oct 11 Rising debt levels will worsen
the credit profiles of China's top 200 companies this year,
requiring the country's banks to raise $1.7 trillion in capital
to cover a likely surge in bad loans, S&P Global said in reports
published on Tuesday.
The study sees little scope for improvement in 2017 amid
worsening leverage and substantial excess capacity in almost all
sectors. Seventy percent of the companies surveyed were state
owned, comprising 90 percent of the sample companies' debt.
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
In such a situation, banks would need as much as $1.7
trillion in recapitalisation funds by 2020. Even under a base
case scenario, they would require $500 billion.
S&P 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
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
On Monday, Beijing announced a series of guidelines aimed at
cutting company debt levels which some fear could destabilise
the world's second largest economy.
Encouraging mergers and acquisitions, bankruptcies,
debt-to-equity swaps and debt securitisation are some of the
measures intended to improve credit allocation and stop wasteful
spending in the economy.
"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."
A Reuters survery showed profits at roughly a quarter of
Chinese companies were too low in the first half of this year to
cover their debt servicing obligations, as earnings languished
and loan burdens increased.
But 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,
highlighting the contrast in performance versus state-owned
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
"The divergence in credit risks between SOEs and private
sector companies will therefore continue to increase," it said.
(Reporting by Umesh Desai; Editing by Kim Coghill)