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China Shifted Some Borrowing to Companies as It Fought the Pandemic

A new report suggests Beijing has been successful in shifting some government borrowing to the corporate sector, as it has enlisted companies to help limit economic fallout from the coronavirus pandemic.

Growth in overall debt has accelerated this year in China, as it has all around the world. But unlike last year, when government borrowing drove the rise in China’s total debt burden, the biggest driver was nonfinancial corporate debt, according to a report released Wednesday by the Washington-based Institute of International Finance.

Nonfinancial corporate borrowing soared to over 165% of China’s gross domestic product in the third quarter this year, from 150% of GDP in the year-earlier quarter, said the IIF, an association of global financial firms which bases its findings on data from international financial institutions, including the Bank for International Settlements and the International Monetary Fund.

According to the IIF’s estimate, China’s total debt topped 335% of GDP in the quarter. That compares with 302% at the end of last year. In 2011, the ratio was 200%, according to the IIF.

The rise in China’s nonfinancial corporate debt was the biggest factor in a surge in global emerging-market debt to above $76 trillion, the IIF’s report said. Excluding China, emerging-market debt actually declined from $31 trillion in the final quarter of 2019 to $29.3 trillion in the latest quarter, the report said. It cited exchange-rate fluctuations as a factor.

Like in many countries, the pandemic has thrown a wrench in China’s efforts to keep debt levels down. But rather than rolling out massive government-financed stimulus measures, Beijing has allowed a pickup in corporate borrowing to avoid a too-dramatic slowdown in activity that could lead to mass layoffs. Much of the borrowing has gone toward job creation and daily operations, according to analysts and company filings.

The strategy has helped China’s economy stage a significant recovery even without across-the-board stimulus. Official data this week showed that industrial output grew by 6.9% last month, the same pace as before the pandemic.

The rise in nonfinancial corporate debt reflects the Chinese government’s efforts to ensure employment without creating excessive government debt, said Emre Tiftik, director of sustainability research at the Institute of International Finance.

Since 2016, when Chinese policy makers set out to curb debt that had soared to worrying levels, the buildup in corporate borrowing had slowed. That changed this year. With the effects of the pandemic on the economy, “they had to make a choice between growth and debt-related problems,” said Mr. Tiftik in an interview.

Beijing has increasingly steered companies toward the corporate-bond market, rather than banks, a trend that has gained more attention due to a spate of corporate-bond defaults, including by a major Chinese chip maker.

Even if more borrowing is shifting to companies, it doesn’t mean the central government or localities around China are off the hook, as much corporate debt is held by state-owned companies. It is difficult to gauge the exact size of the state-affiliated debt since many private and state interests are closely intertwined. The IIF’s Mr. Tiftik estimated that as much as 85% of outstanding corporate debt in China is held by companies with some level of state ownership.

When the coronavirus outbreak erupted in China earlier this year, Communist Party leaders leaned heavily on state-owned enterprises to build hospitals, make masks — and keep workers on the job.

At the same time, it also relied on the help of private companies, from pharmaceutical firms to logistics companies, which were encouraged to issue so-called Covid-prevention bonds that were fast-tracked by the government. In February, a subsidiary of logistics company S.F. Express in Shenzhen issued short-term bonds to raise 500 million yuan ($76 million), including 200 million yuan to ensure deliveries of much-needed personal-protection equipment, the company said in a filing.

China’s corporate-bond market has been roiled in recent days as a coal-mining business and an automotive group have failed to repay bondholders on time.

Chinese regulators’ crackdown on financial risks has resulted in rising investor anxiety as the authorities are less willing to bail out companies defaulting on bond payments, said Yang Weixiao, a Beijing-based economist at Kaiyuan Securities.

“In fact, the local governments are not obliged to bail out the companies that have defaulted. If they help out, that’s a gesture of friendship; if not, they are not at fault,” Mr. Yang said.
Source: Dow Jones

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