China Set to Overtake US as Largest Corporate Debt Market for Non-financials

China will surpass the US as the world’s largest corporate debt market for non-financial companies in the next two years, a report from Standard & Poor’s (S&P) suggests.

“China is poised to overtake the US, and then the US and eurozone combined,” said Jayan Dhru, senior managing director at S&P.

According to the credit ratings agency (CRA), the debt requirements of Chinese companies will reach at least US$18 trillion by the end of 2017, representing a third of the forecast US$53 trillion in new debt and refinancing needs of global companies in the next five years. Debt includes bank loans and bonds and is drawn from public information collated by S&P.

The CRA’s projections suggest that based on a stronger rate of economic growth that propels debt issuance, China’s non-financial corporations could owe US$13.8 trillion by the end of 2014, edging above US corporations’ outstanding debt of US$13.7 trillion. A slower expansion of debt based on the growth of the economy would mean China surpassing the US in 2015, said S&P.

Most of the debt load of Chinese companies currently consists of bank loans, but the magnitude of future funding needs are expected to boost its corporate bond market.

There are, however, concerns that China’s rate of economic growth could slow significantly after three strong decades. “Among a sample of 32 economies, China has the highest risk of an economic correction because of low investment productivity,” noted S&P. The country’s rapid credit expansion in 2009-10 had generated a high ratio of private sector debt to the overall economy.

The CRA notes that about 80 of China’s top 100 corporates are state-owned enterprises, and that its study shows “borrowers’ financial risk profiles are, on average, relatively weak”.

With much of the global demand for debt funding by non-financial companies over the next five years likely to come from the Asia-Pacific region, S&P has lowered its estimates for issuance by companies in Europe and the UK.

“Over the next five years, we estimate that European corporate debt could fall to 20% of the global total, from 24% at the end of 2012,” the CRA commented. “Notably, we project that China’s corporate debt will likely be at least 50% above that of Europe by the end of 2017, despite being at a similar level today.”


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