With Shanghai having limited retail exposure to high-yield bonds, and the Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, it is no wonder that, as Bloomberg reports, analysts fear "a prelude to a storm." Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012. This week a 4th issuer has faced a "payment crisis" and while officials are trying to expand financing for small companies (which account for 70% of China's economy, with debt-to-equity ratios exceeding 200%, this is nothing but more ponzi. As Goldman warns, it appears China's Minsky Moment is drawing near (as the hangover from Q1's credit impulse kicks in).
China's small companies are fundamentally a disaster...
Number of Chinese firms whose liabilities are double their equity has surged since global financial crisis, suggesting more defaults may come.As Bloomberg reports,
Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200% have jumped 68% since 2007
The small companies that dominate China’s private market for high-yield bonds face rising default risks as their debt obligations soar to a record and economic growth slows to the lowest in more than two decades.* * *
Privately issued notes totaling 6.2 billion yuan ($1 billion) come due next quarter, the most since authorities first allowed such offerings from small- to medium-sized borrowers in 2012, according to China Merchants Securities Co. The guarantor of debentures sold by Xuzhou Zhongsen Tonghao New Board Co. stepped in to help after the building materials producer based in the eastern province of Jiangsu missed a coupon payment in March.
Three other issuers have also faced “payment crises” this year, China Merchants said.
Premier Li Keqiang has sought to expand financing for small companies, which account for 70 percent of China’s economy, as expansion is set to cool to the slowest since 1990 at 7.4 percent this year, according to a Bloomberg survey. The nation’s bond clearing house last month suspended valuation of privately placed securities sold by an auto-parts exporter after it failed to clarify media reports regarding a possible default. A polyester maker with similar notes had a bankruptcy application accepted in March.
“The current risks exposed in the private-bond market are probably a prelude to a storm,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants
“There’s been improvement in only some sectors of the economy, not in all.”
As we noted previously, the problems are mounting and global in nature... (As Reuters reports,)
The Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor's, underscoring the growing risk China's debt market is imposing on the global financial system.But that is not good news for the world's investors...
Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday.
China, the world's second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.
"This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at $4 trillion to $5 trillion. "With China's economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase."
...
"As the world's second-largest national economy, any significant reverse for China's corporate sector could quickly spread to other countries."
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