Corporate debt

Coronavirus to stranglehold China’s debt

The coronavirus infection is bound to hit China’s wallet hard. Experts expect corporate bond defaults to jump unless regulators can help facilitate changes in repayments.

As the novel coronavirus continues to spread from the epicenter in Wuhan throughout China and beyond, China’s GDP and credit situation, as well as Chinese companies, will undoubtedly catch the economic bug.

“It will invariably make an already very acute bad debt problem worse,” Diana Choyleva, chief economist of Enodo Economist, a London think tank focusing on China’s economy, told FinanceAsia.

Choyleva expects the Chinese economy to plunge into a recession during the first half of this year, according to Enodo’s calculation of China’s real economy, not official Chinese data. According to Enodo’s calculations, China’s real GDP grew 1.9 % quarter-on-quarter in the fourth quarter last year, while its GDP growth slowed to 3.7% in 2019 from 7.2% in 2018.

For this first quarter, JP Morgan projects China’s GDP growth will slow down to 5.6% year-on-year from the 6% forecast before the virus outbreak. These numbers are based on official Chinese data.

The economic impact of the epidemic for China will be felt most by industries exposed to household spending, said an S&P Global report on February 4. If Chinese consumers cut spending by 10%, this would cause a 1.2 percentage point reduction of China’s GDP in 2020, estimated the rating agency.

Since the coronavirus infection will hurt consumption more than investment in China, it will cause the Chinese authorities “to throw even more money at unproductive investment in an attempt to support growth,” said Choyleva. “That will only worsen China’s ability to place its economy on a sustainable long-term growth path.”

Moody’s said on February 3 it expects the Chinese authorities will continue to ease macroeconomic policy. The central bank had just announced on February 2 it will inject Rmb1.2 trillion into the markets via reverse repo operations.

“Depending on its size and effectiveness, fiscal stimulus will potentially be credit negative for the sovereign, to the extent that measures such as tax cuts or increases in infrastructure spending raise China’s general government debt burden beyond our current expectations,” Moody’s warned.

“From the sovereign perspective, it is fiscal stimulus that results in higher than expected government debt levels that we would be concerned about,” Gene Fang, associate managing director of the sovereign risk group at Moody’s, told FinanceAsia.


Chinese companies suffering from cashflow problems will have to borrow short-term, which will drive up short-term interest rates and add to their debt burden, said Andrew Collier, managing director of Orient Capital Research, a Hong Kong economic research firm.

Many Chinese businesses are already being affected, judging by the measures that various provincial and city governments have put in place to control the spread of the virus, said James Dilley, an associate director of PwC.

A spokesman of the China Securities Regulatory Commission (CSRC) admitted the possibility of some Chinese corporate bonds defaulting, due to the issuers’ liquidity difficulties incurred by the outbreak. The CSRC and Chinese bourses will work with bond investors, intermediaries and corporate issuers to negotiate modifying the repayment terms of these bonds, the spokesman said in a media interview published on the CSRC website on February 2.

The total value of Chinese onshore corporate bond defaults rose to a record Rmb130 billion in 2019 from 117 billion in 2018, according to S&P.

The spokesman played down the current problem, saying for the first quarter, the maturation of corporate bonds on China’s stock exchanges in Shenzhen and Shanghai are manageable. In February, 65 corporate bonds totalling Rmb68.8 billion ($9.9 billion) will mature, while 212 corporate bonds totalling Rmb231.7 billion are due in March, the spokesman disclosed.

Choyleva estimated China’s credit losses amounted to 20% of GDP, if the Chinese government recognised all credit losses, which it did not.

China’s gross nonperforming loan (NPL) ratio could jump above 6% if this health crisis prolongs, added the S&P report. “The resilience of China’s banking system may be tested if the outbreak dragged on for the rest of the year.”

The country’s NPL ratio stood at 1.81% in the middle of last year, according to the China Banking and Insurance Regulatory Commission.

Although Beijing’s stimulus to counter the virus will increase the country’s debt, the debt load will be manageable, but the Chinese government needs to accept weak growth for a few years, said an Enodo report on January 30. “Importantly, investors hoping for a decisive growth rebound once the outbreak is contained are likely to be disappointed.”

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