CHINA’S corporate debt pile — US$16.1 trillion and rising — is a great threat to its slowing economy and will not be so easily managed than its stock market.

    Corporate China’s debts, at 160 percent of GDP, are twice that of the United States, having sharply deteriorated in the past five years, a Thomson Reuters study of over 1,400 companies shows.

    And the debt mountain is set to climb 77 percent to US$28.8 trillion over the next five years, credit rating agency Standard & Poor’s estimates.

    The government’s policy interventions affecting corporate credit have so far been mostly designed to address a different goal — supporting economic growth, which is set to fall to a 25-year low this year.

    It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend.

    Though it wants more of that credit going to smaller companies and innovative areas of the economy, such measures are blunt instruments.

    “When the credit taps are opened, risks rise that the money is going to ‘problematic’ companies or entities,” said Louis Kuijs, RBS chief economist for Greater China.

    China’s banks made 1.28 trillion yuan (US$206 billion) in new loans in June, well up on May’s 900.8 billion yuan.

    The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed, but there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high, and banks are reluctant to take risks.

    Manufacturers’ debts are increasingly dwarfing their profits. The Thomson Reuters study found that in 2010, materials companies’ debts were 2.8 times their core profit. At end-2014 they were 5.3 times. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit. For industrials, from 2.5 to 4.2.

    Gao Hong, investor relationship principal at railway equipment maker Jinxi Axle Co., which has seen its debt-to-core profit multiple triple to 10.25 between 2010 and 2014, said the company struggled to find profitable capital projects to invest in, so it put money into short-term bank products that guaranteed returns.

    “The risk for these (capital) programs is so high and the rate of return so low that we have to make the best decision for our investors (by) purchasing bank products. Last year, we made profits thanks to the sale of CNR shares,” said Gao.

    Much of the new lending is going to China’s State-owned enterprises (SOEs) as part of the government’s fiscal stimulus.

    S&P expects China’s companies to account for 40 percent of the world’s new corporate lending in the period through 2019.

    But quantity is not the only problem. Getting credit to the most efficient companies, where it has the most impact on the economy, would be easier if inefficient companies were allowed to fail, so markets can price debt effectively.

    Policymakers have said they want market mechanisms to play a bigger role in credit pricing but in practice have baulked at the consequences, effectively bailing out companies in trouble, as it did last year when State-backed Shanghai Chaori Solar Energy Science and Technology Co. Ltd. defaulted on a bond coupon payment.

    (SD-Agencies)