China Slow Down Threatens to Expose Huge Bad Loan Portfolio

Economists concerned over rapidly rising corporate debt levels in China are sounding the alarm, warning that major changes are needed to avoid an increase in “zombie” banks and firms.
After expanding at a lightning-fast rate, China’s corporate debt market is now the world’s largest at $14.2 trillion, according to Standard and Poor’s.

Experts worry that too many of the loans have gone to underperforming firms that will never be able to repay — especially in a slowing economy.

Economists surveyed by CNNMoney often cite concerns over runaway credit growth, but many now single out corporate debt as a major threat to China’s economy.

“The risk is that the high debt burden will eventually result in unproductive zombie banks and zombie firms, which are a drag on the economy,” said Julian Evans-Pritchard of Capital Economics.

As China’s economy slows, companies are seeing a lower rate of return on their investments, according to analysts at JPMorgan. Firms also face higher interest rates — making it harder to pay what they owe.

Already, the system is showing stress. China suffered its first corporate default earlier this year, when a solar firm failed to make a payment to bondholders. A few other small companies have followed suit.

So far, central government initiatives to restrain credit growth have largely flopped, especially since many firms have in the past been encouraged to spend their way out of a hole.

Chinese companies are even turning to unconventional financing options — increasing their debt in the process.

via CNN

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza