This is exactly the type of story that makes people deeply suspicious about the sustainability of the Chinese growth model.
Dinny McMahon and Colin Murphy at WSJ have a great story about how large corporations, even loss-making ones, are borrowing more and more thanks to the willingness of state-backed banks to keep lending to them.
They note, for example, a Chinese shipbuilding company called China Rongsheng Heavy Industries Group Holdings Ltd, which only received 2 orders in the first half of last year, and which is losing money, and yet has seen its debt grow 6x in a few years to $4.5 billion, thanks to loans from China Development Bank and Bank of China.
The stock has not had a good run over the last 5 years. Here’s a chart via Bloomberg.
According to the article, which cites a standard chartered research report, corporate debt in China is now around 129% of GDP.
In a report from BofAML, analyst Winnie Wu said that China was mass-producing Zombie Companies being kept alive by the state.
Although there have been a few high-profile restructurings in China, the bankruptcy landscape has been pretty quiet. Wu says she was actually surprised by the latest data on bad loans from the CBRC because they seem to be massively understating the problem:
“The NPL formation seemed to be surprisingly low, given the recent news related to bad debts: Zhongjiang Group, which reportedly filed for bankruptcy, had 3bn loans from CCB. Jade Cargo, an airline which reportedly entered liquidation in June, had 3bn loans from BOC. Rongsheng, the largest private shipbuilder, had 18bn in loans banks are nervously watching. In the troubled solar sector, the top 10 players collectively had 111bn of debts. The relatively few cases seem to suggest that the amount of potential risky loans may be much higher than the reported NPLs.”
Meanwhile, bad loans in Wenzhou, a city in China’s Zhejiang province known in financial circles as ground zero of China’s ominous shadow banking system, recently surged to a 10-year high. Wu calls Zhejiang “an early reflection on China’s economic challenges,” making it important to keep a close eye on.
Wu implies that NPL numbers are being held down ahead of a major leadership transition in the Chinese government that takes place at the beginning of next year in order to ensure social stability, but says it should cause concern “that more ‘zombie companies’ are being made in the economy.”
This chart should give you a feel of how 2012 was a gigantic year for bond issuance.