China’s Rising Corporate Debt Poses Significant Risk for Global Credit: S&P, Reports Reuters

HONG KONG (Reuters) – A new report from S&P Global, published on Thursday, indicates that Chinese companies are expected to account for nearly two-thirds of the new credit raised globally by 2020. This trend is driven by the world’s second-largest economy’s reliance on the corporate sector to bolster growth.

The report emphasizes the challenges posed by China’s opaque and expanding corporate sector, alongside the rapid rise of leveraged finance in the U.S., both of which present significant risks for global credit markets. It forecasts that outstanding global debt will grow by 50% to reach $75 trillion by 2020, with China’s share increasing from 35% to 43% of the global total.

S&P anticipates that these credit risks will persist as governments and central banks are likely to maintain their expansive monetary policies to stimulate inflation and economic growth. The report states, “Central banks remain captivated by the notion that credit-fueled growth is beneficial for the global economy.”

Concerns over the long-term sustainability of corporate debt are also highlighted, as a growing number of companies are becoming highly leveraged, contributing to a decline in corporate credit quality worldwide. A study by S&P found that around 40% of the 14,400 non-financial companies surveyed are categorized as highly leveraged, ranking in the lowest tier of a six-point financial risk profile scale.

S&P suggests that a potential scenario for an orderly credit correction could unfold gradually over several years, where weaker companies falter one by one. The report states that between 2016 and 2020, China is expected to represent 45% of total global debt demand and 62% of new credit demand, indicating continued reliance on debt for growth amid challenging conditions.

The agency warns that “the downside risks are significant, especially if Chinese officials fail to effectively manage the rebalancing of the economy.”

Additionally, the report raises concerns for investors navigating a rapidly expanding global bond market, where yields have fallen below zero as fears regarding economic growth grow. It notes that investors are increasingly purchasing speculative-grade corporate debt, including those from emerging markets, and extending bond maturities in hopes of achieving positive yields, presenting a risk as these rewards become less sustainable.