The Chinese sectors where corporate debt default risks are the most acute, in one chart

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  • In 2018, Chinese firms defaulted on RMB108 billion of local bonds, more than triple the amount seen in 2017.
  • Macquarie Bank has created a debt coverage ratio for Chinese corporate debt issuers in an attempt to evaluate what sectors are most at risk of defaulting this year.
  • It says interest rate payment risks in sectors like infrastructure, transport and equipment, machinery, utilities and real estate has deteriorated over the past year.

If you’re wondering where the next corporate debt defaults in China are likely to be occur, the chart below from Macquarie Bank may well have the answer.

Macquarie Bank

It’s the debt coverage ratio from 760 Chinese corporate bond issuers, colour-coded by the sector the firm primarily operates in.

Macquarie says the ratio is simply interest payments divided by earnings before interest and taxes (EBIT).

“Generally, the higher the ratio, the less financially sound the company probably is,” Macquarie says. “If the ratio exceeds 100%, EBIT is insufficient to cover interest payments and, of course, pay down the debt itself.”

As at the end of the September quarter last year, the bank says that despite a small reduction in outstanding total debt of this group from RMB26.8 trillion at the end of 2017 to RMB26 trillion, more companies have reported a lift in their debt coverage ratio to above 100%, suggesting a slight “deterioration in China‚Äôs corporate earnings circumstance”.

So where, as things currently stand, are the default risks most acute in China?

Macquarie says that from a broad perspective, they’ve shifted from upstream sectors to firms further down the value-added chain.

“The interest rate payment ability has actually improved in sectors such as mining, smelting and materials and intermediate manufacturing. Both have reported a lower debt uncovered ratio in 2018,” Macquarie says.

“But a deterioration of interest rate payment ability still exists in sectors like infrastructure, transport and equipment, machinery, utilities and real estate.

“Such divergence proves that supply-side reform has generally succeeded in upstream sectors, and that the manufacturing sector is reporting improving margins.

“However, heavy and construction-related industries are reporting rising margin pressure, although their situation is still better than that of 2016.”

According to Bloomberg, RMB3.5 trillion in Chinese non-financial corporate debt will mature in 2019. In 2018, Chinese firms defaulted on RMB108 billion of local bonds, more than triple the tally seen in 2017.

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