China’s Corporate Borrowing Overtakes US

China’s corporate bond market has become the world’s biggest, overtaking the US, credits rating agency Standard & Poor’s (S&P) reports.

Chinese corporate borrowers owed US$14.2 trillion at the end of 2013 against US$13.1 trillion owed by US. China’s move to the top ranking took place a year earlier than it had expected, said S&P.

By the end of 2018 it forecasts that Chinese companies will borrow US$20 trillion, a third of corporates’ debt requirements globally, a trend supported by the increased willingness of the Chinese authorities to allow more government-related entities to issue debt securities.

China, currently the world’s second-largest economy, now finances 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% of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector,” the CRA reports, estimating the figures at US$4 trillion to US$5 trillion. “With China’s economy likely to grow at a nominal 10% per year over the next five years, this amount can only increase.”

S&P adds that it expects the Asia Pacific (APAC) region, led by China, to account for half of global corporate debt financing needs of $60 trillion over the five-year period to 2018 when it will account for more than half the projected total debt outstanding of US$72 trillion.

However, cash flows and leverage at Chinese corporations – which in 2009 S&P said were the best compared against global peers, have deteriorated to become the worst said the CRA, with the country’s property and steel sectors ‘of particular concern’.

The report also notes that European companies are increasingly accessing debt markets for financing, as bank lending in the region continues to contract. Capital market funding costs in the region remain at historic lows for higher-rated borrowers and non-financial companies have raised US$530bn in the European bond markets over the past five years.

Although the figure is much lower than the US$3.8 trillion in net new loans raised between 2003 and 2008, S&P believes that banks’ capacity to increase lending will remain limited, and that Europe therefore has the greatest potential for further disintermediation in borrowing.

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