Matthew Miller and Umesh Desai Beijing and Hong Kong

China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

Chinese non-financial firms held total outstanding bank borrowing and bond debt of about $12 trillion (R131 trillion) last year, equal to over 120 percent of gross domestic product, according to Standard & Poor’s estimates.

Growth in Chinese company debt has been unprecedented. An analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan (R3.24 trillion) to 4.74 trillion yuan, between December 2008 and September last year.

While a credit crisis is not expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their loans.

More defaults were expected, Christopher Lee at Greater China corporates at Standard & Poor’s Rating Services in Hong Kong said.

“Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.”

China rarely allows corporate failures, particularly of state-backed companies, partly out of fear that widespread lay-offs could lead to social unrest. In cases where firms have effectively gone bankrupt, domestic bondholders tend to be paid off ahead of other debtors.

China Erzhong Group (Deyang) Heavy Industries, a loss-making manufacturer of equipment for the steel and power industries, faced higher borrowing costs after a wholesale restructuring, Huang Guozhan, an executive at the board secretary’s office, said.

The firm, which expects a 2013 loss of 3.15 billion yuan and may see its shares suspended, held debt of 11.4 billion yuan in September, according to stock market filings.

In July last year, China’s state-owned assets supervision and administration commission ordered China Erzhong, together with its parent company, to merge with China National Machinery Industry, another state-controlled enterprise.

A management reshuffle followed, while a proposed 1.9 billion yuan asset sale was cancelled. Accumulated losses might drive up the cost of the company’s loans, Huang said, should banks cut the company’s ratings.

“Tight credit growth and higher borrowing costs will make it a tough year,” Stephen Green at Standard Chartered Bank said.

China’s massive holding companies, power producers and construction materials firms are among the most highly leveraged, with each sector reporting twice as much debt as equity at the end of September last year. – Reuters