21 October 2016
Sinosteel Corp. has again delayed an interest payment on a bond after seeking a postponement from creditors last month. Photo: AP
Sinosteel Corp. has again delayed an interest payment on a bond after seeking a postponement from creditors last month. Photo: AP

China ‘Ponzi finance’ raising default risk by debt-laden firms

Cash-strapped Chinese companies are taking on record amounts of debt to repay interest on existing loans, raising the risk of defaults.

As a result, policymakers are under added pressure to keep financing costs low, Bloomberg reports.

Such debt is expected to rise 5 percent this year to a record 7.6 trillion yuan (US$1.2 trillion), according to Beijing-based Hua Chuang Securities Co.

The so-called “Ponzi finance” uses borrowed funds to repay interest.

Chinese companies are struggling to generate enough cash to service loans as economic growth slows to the weakest pace in 25 years and corporate profits shrink.

While the debt burden has been eased by six central bank interest-rate cuts in the past 12 months and a tumble in corporate borrowing costs to five-year lows, the number of defaults in China’s onshore corporate bond market has increased to six this year from just one in 2014.

“Some Chinese firms have entered the Ponzi stage because return on investment has come down very fast,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second biggest insurance company.

“As a result, leverage will be rising and zombie companies increasing.”

China Shanshui Cement Group Ltd. became the latest company to default on yuan-denominated domestic notes last week as overcapacity in the industry hurt profits and a shareholder dispute stymied financing.

State-owned steelmaker Sinosteel Corp., which pushed back an interest payment on a bond last month, postponed it again this week.

Metrics of corporate health in Asia’s largest economy have deteriorated as growth slowed.

The number of Shanghai and Shenzhen-listed companies that have less cash than short-term debt, net losses and contracting revenue has increased to 200 as of June from 115 in the year-earlier period, according to data compiled by Bloomberg.

Total debt at listed companies has climbed to 141 percent of common equity, based on a market-capitalization weighted average, the highest level in three years.

While the total amount of debt issued to pay interest is projected by Hua Chuang Securities to increase, it’s taking up a smaller portion of overall new credit.

The firm predicts such borrowing will account for 45 percent of new total social financing — which includes bank loans, shadow banking credit and corporate bonds — down from 50 percent last year, according to a Nov. 4 report.

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