Repayment pressure rising, along with bankruptcy concerns

Country's debt risk is 'generally controllable', but more defaults of financial products may occur in the coming months

China's debt issues may continue producing negative noise in coming months, and repayment pressure is bound to increase as more debt matures and economic growth slows, experts said.

Analysts at home and abroad warn that 2014 will see an unprecedented amount of debt mature in all kinds of financing channels, from trust loans to local government financing vehicles.

But the differing credit structure between China and the United States makes chances of systemic disruption slim for the former.

Premier Li Keqiang told a news conference at the conclusion of the annual session of the National People's Congress on Thursday that debt risk is "generally controllable" but defaults of some financial products are hard to avoid.

He also said China "doesn't want to let today's stepping stone become tomorrow's stumbling block".

"Li reiterated the country's determination to abandon its pursuit of growth anchored in investment and exports. The challenge is to digest the stock of debt, formed mainly during the former economic stimulus plan, and not trigger systemic disruption," said Tang Jiangwei, a senior economist with Bank of Communications Co Ltd. "And how to support sustainable growth when easy money is no longer easy."

Media reported on Tuesday that East China's Zhejiang-based property developer Xinrun Real Estate Co, with 3.5 billion yuan ($569 million) of debt, has collapsed and its largest shareholder detained.

Shanghai-based Chaori Solar Energy Science and Technology Co Ltd reported China's first corporate bond default in early March. The company paid 4 million yuan of an 89.8 million yuan coupon payment, due March 7.

China Credit Trust Co was bailed out in January on a 3 billion yuan trust product tied to a failed coal miner.

A similar product created by Jilin Province Trust Co has missed five payments worth 872 million yuan.

"We believe that the high level of leverage in the economy, combined with slowing growth and rising interest rates, implies rising default risks," said Dariusz Kowalczyk, a strategist at Credit Agricole CIB. "We expect defaults of other corporate bonds and trust products as well as one or two bankruptcies of small local banks this year."

Several reports noted that China faces unprecedented repayment pressure: a total 5.3 trillion yuan of trust loans to mature this year, 50 percent up year-on-year, according to Haitong Securities Co Ltd.

Local government financing vehicles (set up to meet local government financing needs for mainly infrastructure projects) need to repay about 82.5 billion yuan by the end of April, 37 percent of this year's 224.84 billion yuan total, according to data from China Chengxin International Credit Rating Co, Moody's Investors Service's joint venture in China.

Moreover, 945 listed medium-sized and large non-financial companies showed total debt soared more than 260 percent to 4.74 trillion yuan between December 2008 and September 2013, a Thomson Reuters' calculation said.

Many overseas analysts said China's economic growth is increasingly credit-consuming.

The past six to seven years have seen economic growth and credit dynamics on crossed trajectories. Growth decelerated from about 11 percent 12 percent in 2006-07 to 7 percent 8 percent now while an increase in social financing gained momentum.

"In any economy in the world, this situation would lead to deterioration in payment behavior. China should be no exception," a report by Credit Agricole CIB said. Several default cases have triggered concerns about the Chinese market in recent months. "Major risks stem from real estate and other industries with excess capacity like mining and metallurgy. Trust projects financing the property industry are suffering from very tight cash flow this year, and some are very likely to default," Lin Caiyi, chief economist with Guotai Junan Securities Co Ltd wrote in a recent report.

In mid-2013, China's local and central government debt was 56 percent of GDP, according to Wang Tao, chief China economist of UBS AG.

By contrast, US federal, state and local debt was about 100 percent of GDP in 2010, according to calculations by Ryan Rutkowski, an analyst with the Washington-based Peterson Institute.

"The debt/GDP ratio for China is not very high, compared with the US and some European countries. Meanwhile, the Chinese government controls a big sum of good quality assets, which guarantees strong management over financial stability," Tang at the Bank of Communications said.

Loans in China often went to property and infrastructure projects rather than personal consumption, he said, making another big difference between China and the US, hit by the subprime crisis.

"Although returns may come slowly, even unable to meet debt maturity, at least they went to investment and would bring gains in the future," he explained.

Wang from UBS said the debt level was "manageable" but its rapid rise was "alarming." Local debt now equals about 33 percent of China's gross domestic product, up from about 10 percent in 2008 and almost nothing in 1997.

Premier Li said in his news conference that China's overall debt is controllable and the government should enhance oversight and solve problems in a timely way to ensure no systemic and regional risks.

Authorities have moved to clear debts accrued over the past several years, a reaction to concerns that China's debt issue is worrisome, mainly because of rapid expansion of the shadow banking sector.

As the central bank deleverages the shadow banking sector and encourages banks to bring loans back onto their balance sheets to monitor risks, on-balance-sheet bank loans accounted for nearly 64 percent of new credit issuance in China in the first two months of 2014, up from 55 percent last year. At the same time, lending by trust companies fell from nearly 11 percent of new credit to just over 5 percent, the Financial Times reported.

"It is quite clear that we shall not expect any big-scale economic stimulus program at this stage. But it does not mean investment is discouraged," said Tang with the Bank of Communications.

"In fact, growth and urbanization demand smart investment. However, the authorities should think about how to diversify investors and capital sources," Tang added.