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| +Sara Hsu |
Sara Hsu:
More in the the Diplomat.The difference between the debt structure of corporations in China and the U.S. is crucial. In terms of non-bank borrowing: while Chinese borrowings from the shadow banking sector are neither guaranteed by the state nor by deposit insurance, and generally meet lower standards of risk with low to no transparency, U.S. borrowings from the corporate bond sector are traded on the open market, and have clear risk ratings and high levels of transparency.China’s debt structure is therefore riskier than the U.S. equivalent, and worrisome due to its sheer size. As China’s economy declines over the short run, which corporates are at risk of loan default?Access to bank, trust and entrusted loans has increased China’s level of corporate debt and leverage ratios, with corporate bond issuance remaining at a minimal level. While bank loans in China have tended to be extended to large and midsize firms, and particularly to state-owned firms, trust and entrusted loans have been extended to firms of more varied size and ownership structures. Some of these latter entities have riskier business models and fundamentals. They often lack a well-established credit history of sufficient collateral, and sometimes even lack a strong underlying business model. Across both the banking and shadow banking sectors, industries with the highest leverage ratios include the real estate, metal and mining/steel, infrastructure, and construction industries.Private firms are most at risk in the face of potential loan deterioration, particularly within industries with high leverage ratios. In the face of underdeveloped bankruptcy resolution, Chinese firms are encouraged to work out their debts as best they can. State-owned firms have a clear advantage – firms backed by the state may receive capital injections in the form of new bank loans, while bank loans that have turned nonperforming can be pulled of the books of the largest state-owned banks and purchased by asset management companies. By contrast, private firms do not have such a luxury. Firms that have faced default in recent months have mainly been private firms; examples are Zhejiang Xingrun Properties, which defaulted in March on RMB3.5 billion ($562 million) in bank and other debt, and Shanghai Chaori Solar Energy Science and Technology Co, which defaulted in March on an RMB4 million bond coupon payment.
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