China companies resist reform push

HONG KONG: For all Premier Li Keqiang’s rhetoric about unrelenting economic reform, companies listed in Shanghai are building up debt at the fastest pace in three years as it gets harder to finance growth from earnings.

Total debt at 1,003 Shanghai-traded nonfinancial firms increased 18% in the last 12 months, the fastest pace in three years, to a record 868.3 billion yuan (US$136bil), the latest Bloomberg-compiled filings show. The debttocommon equity ratio, adjusted for market value, has risen to 123.1% from 121.5% a year ago and 88.7% back in 2010.

China’s growing debt pile is at odds with Premier Li’s vow to rebalance the world’s secondlargest economy and reform bloated stateowned enterprises. Banks are straining under the most nonperforming loans since 2008 while attempts to make the equity market an avenue for deleveraging ended in a market collapse and a freeze in initial public offerings in July.

“The long awaited deleveraging of China’s corporate sector hasn’t started yet,” said Xia Le, the chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong.

“Firms are still piling up debt in support of their capital spending.”

About 16% of companies listed on the Shanghai stock exchange generated losses in the last 12 months, more than double the number a year ago, Bloomberg-compiled data show.

Government, corporate and household obligations ballooned to US$28.2 trillion, or 282% of China’s gross domestic product as of mid2014, according to McKinsey & Co, and in April, a state-owned enterprise became the first ever to miss an onshore payment obligation. Unadjusted, the average debt-to-common equity ratio looks even worse, at a 205.7%, the highest in at least a decade.

Eleven companies have a ratio exceeding 1,000%. Onshore bond sales from nonfinancial companies total 3.1 trillion yuan this year, up from 2.4 trillion yuan the same period of 2014, Bloomberg-complied data show.

The Shanghai Composite Index has now declined 39.7% since its June 12 peak after losing 2.7% yesterdayday, the most in three weeks.

Weaker demand for Chinese goods could add to the stress facing those companies that rely on selling their wares to the rest of the world. Exports declined for a second consecutive month in August and although the People’s Bank of China devalued the yuan last month, a move some economists said was to tackle weakening exports, any impact is yet to show. “Policy makers intend to reduce leverage in the economy, but they’re also trying to make it a smooth process,” Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co, said. “That’s why the government has focused on developing the bond market as a financing venue for Chinese companies.” Borrowing expenses for smaller, privatesector companies are also still elevated, with data from the Wenzhou Private Finance Index putting funding costs for small to mediumsized enterprises at 17.5% on a national level versus a one year benchmark lending rate of 4.6%.

“The rising debttoequity ratio of listed companies shows that the wealth creation in China heavily relies on credit expansion,” said Zhao Yang, the chief China economist at Nomura Holdings Inc in Hong Kong. — Bloomberg