China’s USD17tr Debt Mountain Isn’t as Scary as It Looks – 6 Jun 2017

  • Looking beyond the negative headlines of China’s massive debt pile, one encouraging fact stands out: China’s biggest companies are healthier than they’ve been in years.
  • Thanks to a combination of economic stimulus and state-owned enterprise reform, debt-to-equity ratios at China’s largest non-financial firms have dropped to the lowest levels since 2010. Gauges of profitability and interest payment capacity are the strongest in at least five years, while free cash flows have never been bigger.
  • The improvements could help ease fears of a looming financial crisis in the world’s second-largest economy, even though smaller Chinese companies have made less progress so far. Deutsche Asset Management, which oversees about USD800bn, says stronger balance sheets support a bullish outlook for China’s stock market after the Shanghai Composite Index trailed all of its Asian peers in 2017.
  • Vital signs at the country’s largest listed companies are getting stronger. The market capitalization-weighted average debt-to-equity ratio at China’s 100 biggest non-financial businesses dropped to 68% at the end of 2016 from 72% in 2015, according to data compiled by Bloomberg. Profit margins and interest coverage ratios also improved, while free cash flows for the group swelled to a record USD93bn. Stronger corporate credit metrics help explain why there’s been little sign of a pickup in defaults as borrowing costs rise, according to Goldman Sachs Group Inc.
  • To be sure, the financial metrics compiled by Bloomberg exclude unlisted borrowers and heavily-indebted local governments. Sceptics say even the improvements at big public companies are temporary — the result of economic pump-priming before a politically-sensitive leadership reshuffle in the ruling Communist Party toward the end of 2017. The economy’s strong start to 2017 has already shown signs of levelling off, with a private gauge of manufacturing signalling a contraction in May 17.

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