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China defaults to rise as corporate debt burden climbs: S&P

[HONG KONG] China's corporate debt market, already the largest in the world, has continued to worsen as the world's second-largest economy slows, and defaults are expected to increase, rating agency Standard & Poor's said in a report on Thursday.

Sovereign support could be forthcoming in the case of state-owned enterprises but its scope and effectiveness was uncertain, S&P said, while pointing to the recent state intervention during the stock market turmoil, the ratings agency said. "The Chinese central government's 'capitalism with Chinese characteristics' has led to the corporate sector (including state-owned enterprises) incurring more debt than the sovereign," the agency said in a report, noting that the corporate debt burden was eight times government debt.

China's corporate debt-to-GDP rose to 160 per cent to US$16.1 trillion in 2014, twice that of the United States, from about 120 per cent in 2013, and was expected to worsen since corporate debt would outpace GDP growth in coming years.

China's corporate debt would further rise to US$28.5 trillion in 2019 and could destabilise financial markets. "Rapid debt growth, opacity of risk and pricing (partly due to bank loans dominating funding), very high debt to GDP, and the moral hazard risk of the Chinese market make it a high risk to credit," S&P said.

Even though the credit cycle was slowing in China, the credit growth rate remained faster than most countries, S&P said.

Data released this week showed China's banks made 1.28 trillion yuan (S$280 billion) in new loans in June, handily topping market expectations. Broad money supply growth quickened last month, thanks to the central bank loosening policy to support the slowing economy.

This follows four rate cuts made by the central bank in the past seven months and loosening of cash reserve requirements.

S&P estimates that globally, companies may seek up to US$57 trillion over 2015-2019, with China consuming US$23 trillion or 40 per cent of global demand. Outstanding corporate debt globally would grow 40 per cent to US$71 trillion by 2019, 40 per cent of which would be China's share.