S & P: “Chinese Companies will Struggle”
The Chinese economy is cooling down and the corporate bond market is getting colder. Enough to worry the rating agency S & P Ratings. “This slowdown threatens to weaken the profitability of Chinese companies in all sectors of activity, warn analysts. As demand declines and margins contract, their ability to service the debt will be reduced. In other words, they run the risk of running out of cash when they meet their deadlines.
However, the amount of debt to be refinanced or repaid this year will reach 4,200 billion renminbi, or nearly 550 billion euros. A figure multiplied by one and a half if one includes the early repayment options of certain obligations. That is an increase of 15% compared to 2018. Among the actors confronted with this debt wall, we find the controversial financing vehicles of local communities, followed by companies in the mining and metallurgical sectors, as well as real estate.
Beijing has already implemented, at the end of 2018, a relaxation of its monetary policy to make financing conditions more favorable. The government has also announced a tax reduction program for small businesses. “This should enable them to save 200 billion renminbis [26 billion euros, ed] per year for the next three years,” said S & P.
Other fiscal measures are expected, as well as, probably, a fiscal stimulus package via major infrastructure projects. But these measures should not benefit the smaller companies. “The central bank’s liquidity injections and government measures will likely benefit the large groups that hold the top positions in their sector,” analysts said.
And even for these the situation should remain tense. Especially since access to the bond market will be complicated. “New debt issues are becoming increasingly short-term, meaning that businesses are more vulnerable to future deterioration of credit market conditions. ”
Hunt for “zombies”
The Chinese authorities should nevertheless continue their policy of reorganizing state enterprises. “We should see this year more restructuring, debt-to-capital conversions, liquidations, perpetual bond issues, to keep the goals,” says S & P. With the zombie companies in the sights, which only by using indebtedness, which may well disappear.