Corporate China Reaches New High For Loan Defaults

Corporates across China have reached a record high for loan defaults in 2019, according to a Financial Times report from Thursday (Dec. 26).

Corporate defaults spiked to about $18.6 billion this year, up from $17.44 billion last year, new data from Bloomberg found. Reports also noted that China’s economic growth dropped to its lowest rate in three decades. Meanwhile, separate data from S&P Global Ratings found that defaults on U.S. dollar bonds hit $2.9 billion for the year.

“The recent pickup in defaults adds to broader evidence that corporate balance sheets remain under strain,” Capital Economics’ Senior China Economist Julian Evans-Pritchard recently said in an analyst note.

According to reports, the surge in corporate defaults can be largely attributed to a borrowing spree among private Chinese corporations in recent years. Industries such as chemicals and textiles are said to be facing particularly intense financial pressure toward the end of the year.

The defaults can also be attributed to rising reliance on shadow banking among corporate borrowers, with some corporates in certain industries now struggling with oversupply. The Chinese government has taken measures to crack down on shadow banking in recent years, which has added to financial pressures for corporate borrowers.

“Reduced funding access for weaker shadow banks could result in increased credit events and defaults, particularly against the backdrop of a slower environment, which can be particularly acute for private sector enterprises,” said Fitch Associate Director Rowena Chang in a research report earlier his month.

But these challenges are being felt beyond the private sector. State-run businesses are also struggling, with analysts now raising concerns about a possible pullback in government support in the new year.

“The 2020 wish lists for China’s local government officials are likely to include new bailouts of local debt,” said Rhodium Group researchers Logan Wright and Allen Feng in a separate report. “But the debt levels are just too large at this point.”