According to a recent report by Standard and Poor China has become the world’s largest issuer of corporate debt, citing a total non-financial corporate debt figure of USD 14.2 trillion. This however underscores the difficulty statistics present when making cross-country comparisons.
The S&P report relies on figures released by the People’s Bank of China, but include one important oversight. The PBoC counts all non-financial corporate debt, including that owned by local Government financing vehicles (LGFV.) A closer look at the data shows that although Chinese companies are on track to overtake their US counterparts in terms of debt, but still a way to go. Including these LGFVs is like including the debt of Detroit alongside that of American Airlines.
That said, differentiating who owes what to whom, doesn’t decrease the overall amount of debt building up in the system. One particularly worrying development was China’s first default on domestic bond market since the central bank started regulating the market in 1997.
On March 4th, when Shanghai Chaori Solar Energy Science and Technology declared it lacked the funds to make full interest payments on its corporate bonds no government assistance was forthcoming. While this failed to lead to any significant knock on effects, it did signal the Chinese government is no longer prepared to keep underwriting the bad debts of client corporations.
Many feel that the lack of intervention was meant as a subtle nudge to the market to start pricing risks appropriately. However, the overall build-up debt in the Chinese economy remains a cause for concern as a string of such defaults in rapid succession could lead to a chain reaction and panic.
