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Corporate Defaults – Chinese Firms with Dollar Debt, Pain is Coming

Corporate Defaults - Chinese Firms with Dollar Debts

There will be an increasing number of defaults as the rising cost of borrowing and the weakening Chinese yuan could result in firms ability to meet upcoming payments over the next 3 years. Bonds will be maturing and the exposure in US dollars will be, in some cases, painful for Chinese firms.

In a report by the investment bank Nomura, the amount of dollar-denominated Chinese corporate debt debt stood at about $751 billion in the third quarter (the report was dated November 7. This number is double the amount of debt reported at the end of 2015. Projections show that an average of $33.3 billion of Chinese corporate dollar bonds will mature each quarter from the fourth quarter of 2018 to the end of 2020, sharply higher than the estimated $11 billion that matured in the third quarter of this year. Of course this rapid rise will impact the number of defaults in 2019 and 2020.

Although Chinese companies can issue debt in yuan, many can raise funds in US dollar or a range of other currencies. So with the yuan falling by more than 6 percent against the US dollar so far this year, and some analysts calling for a further fall, the ability to pay back debt is only getting more difficult for these firm. Sure, the weak yuan increases competitiveness of China exports, it also impacts the debt payments and increases the cost of importing commodities and raw materials.

China is seeing a slowdown in its economic growth as the economy matures. The GDP expansion is, from the third quarter this year, at 6.5% year-over-year and is now at its weakest pace since 2009.

And note that some Chinese companies are now issuing new bonds to cover or pay off current obligations. With the declining demand for new bond issuance, it will make it more difficult for these firms to raise badly needed funds.

China is moving into hard times in the coming years.

Team Classiarius

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