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Chinese corporate debt is the ‘biggest threat’ to the global economy, says Moody’s chief economist (CNBC)

22 December 2019

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CNBC title: Chinese corporate debt is the ‘biggest threat’ to the global economy, says Moody’s chief economist

Date of publication: 17 December 2019

KEY POINTS

  • While corporate debt is a “fault line in the financial system and the broader economy,” Moody’s Chief Economist Mark Zandi flagged Chinese indebted companies as the “biggest threat.”
  • A similar warning by Fitch Ratings last week said that private companies in China have defaulted on their debts at a record pace this year.
  • In an October report, the ratings agency put it down to a tightening of credit as a result of the government’s deleveraging efforts.

“Chinese corporate debt is the “biggest threat” to the global economy, warned a Moody’s Analytics economist, who described such risks as a “very significant fault line.”

That followed similar comments by Fitch Ratings last week, which said that private companies in China have defaulted on their debts at a record pace this year.

While corporate debt is a “fault line in the financial system and the broader economy,” Moody’s Chief Economist Mark Zandi flagged indebted Chinese companies as the larger risk.

“I would point to Chinese corporate debt as the biggest threat,” he said, adding that it’s growing very rapidly in China.

Zandi explained that many companies are struggling to deal with a slowdown in growth stemming from the trade war and other factors.

“In the United States, it’s similar kind of picture — not to the same degree — but we have seen very significant increase in so-called leveraged lending, as in lending to highly indebted companies, and they are vulnerable if the economy were to slow,” Zandi said.

Debt has been a problem in the world’s second largest economy, which has been trying to reduce its reliance on it by tightening regulations to speed up deleveraging — or the process of reducing debt.

However, the trade war is putting a dent in its efforts to pare its massive debt levels as China seeks ways to boost its slowing economy, which has been hit by U.S. tariffs on Chinese exports.

The country has this year more or less paused its deleveraging efforts and put in place more stimulus.

Fitch Ratings said last week that a record high of 4.9% of China’s private issuers defaulted on onshore bond payments — or yuan-denominated bonds — in the first 11 months of 2019, a jump from 0.6% in 2014.

In an October report, the ratings agency put it down to a tightening of credit as a result of the government’s deleveraging efforts.

Local governments have also shown a “greater tolerance” towards defaults, it said.

“Around 80% of the onshore defaults by both issuer count and principal amount were from the private sector, being more vulnerable than state-owned enterprises (SOEs) to external funding market volatilities — and therefore face greater liquidity and/or refinancing risk under tight credit conditions,” the report said.”

Sources:
https://www.cnbc.com/2019/12/17/chinas-corporate-debt-is-biggest-threat-to-global-economy-moodys.html

Moody’s Analytics, August 2019: Tip of the Iceberg: The Global Ramifications of a China Debt Crisis

Reuters, 10 December 2019: China’s private firms face record default risk, to stay high in 2020 – Fitch

Fitch Ratings, October 2019: China CorporateBond MarketBlue Book

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