Concerns have for long been mounting over the state of China’s $45tn financial system in an economy built on debt. The nation’s central bank and its top financial regulator pledged in the new year to step up measures to shore up its troubled banks and small businesses while continuing a crackdown on shadow banking and property speculation.
But Chinese companies are facing a reality check after years of ramping up debt. A de-leveraging campaign President Xi Jinping began in 2016 to curb risks in financial markets has led to a crackdown on unregulated lending – shadow banking – and tighter rules on asset management. That made it harder for some to raise funds to repay existing debt, leading to a record number of bond defaults in 2018 and 2019 as economic growth slowed. 
The problem is big, for sure, with the potential to worsen. Chinese onshore company bond defaults in 2019 reached more than 150 – well past the 2018 record of 120. Missed payments totalled more than 130bn yuan ($18.7bn), compared with 2018’s high of 122bn yuan, which itself was more than quadruple the level in 2017. 
Private-sector firms accounted for more than 80% of defaults in 2019, according to Bloomberg data. Moody’s Investors Service said it expects 40 to 50 new, first-time defaulters in 2020; there were about three dozen in 2019.
Investors and banks historically have favoured state-backed borrowers and are reluctant to extend credit to smaller, private companies. On top of that, the government’s surprise seizure of Baoshang Bank Co in May 2019 – the first such takeover in two decades – cut many investors’ tolerance for risk. 
Meanwhile, growth in the broader economy has been losing steam and weaker companies can be subject to funding squeezes and higher repayment pressure.
Chinese companies have been piling on debt for at least a decade, ever since the leadership team under Xi’s predecessor responded to the global financial crisis by going on a borrowing binge. That kept China’s economy chugging, but at a cost. The corporate debt to GDP ratio surged to a record 160% at the end of 2017, from 101% 10 years earlier. 
A particular worry has been China’s $10tn shadow banking system. Local government financing vehicles, set up to fund infrastructure projects, have already defaulted on many trust loans (which were part of that system), but had yet to suffer a bond default as 2020 began.
The broader economy, however, is loaded up on debt. Slower growth challenges China’s ability to stem the buildup of its government, corporate and household debt, which according to Bloomberg Economics is on track to add up to more than 300% of GDP by 2022. 
China is a key driver of global growth, but expansion in the world’s second largest economy has been sputtering. China’s $14tn economy, second in size only to the US, accounts for almost a third of global growth each year. That makes it a vital driver of job creation and improved living standards everywhere. 
The bigger China’s debt pile becomes, the harder the impact on global growth should it all go sour.
Related Story