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China's debt time bomb?

China has accumulated an unprecedented debt pile in the 10 years since the global financial crisis. What are the potential consequences of this debt buildup for China and for the global economy?

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China's debt time bomb?

  1. 1. China’s debt time bomb? What are the possible end games following China’s unprecedented debt boom
  2. 2. Some context… • China has built up an unprecedented debt pile in the aftermath of the GFC • Increases in debt of this magnitude and speed have historically led to financial crises • The corporate sector has been the main driver of this debt boom • China now bears the highest stock of corporate debt of any major economy • Understanding these corporate borrowers is key to assessing the risks of China’s debt pile Background • Who are these corporate borrowers and what is their financial condition? • How is debt distributed across industry sectors? • What proportion of debt is owed by highly leveraged companies? • How has leverage evolved over time and across sectors? This document provides a deep dive analysis of the debt owed by over 1,300 Chinese companies listed on domestic and international exchanges Key questions 1
  3. 3. China bears the highest stock of corporate debt of any major economy 2 0 50 100 150 200 250 300 350 400 Finland Portugal Netherlands Singapore Norway France Sweden Belgium China UK Hungary Canada NewZeland Australia Spain Israel Turkey Italy Switzerland UnitedStates Brazil Argentina Indonesia Mexico SaudiArabia India Poland Chile Russia Thailand Germany CzechRepublic Denmark Greece Korea EuroArea Japan Malaysia Corporates Households Government Total non-financial sector debt % of GDP, 2016 Source: BIS total credit statistics
  4. 4. -5.3-5.5 -4.5 -3.5 -3.0 -2.6-2.4-2.2 -1.8 10.710.7 9.8 8.8 7.7 6.6 5.6 4.4 3.7 5.55.25.35.3 4.7 3.9 3.1 2.2 1.8 2012 201420132009 201520112010 H1 172016 Gross debt build-up partially offset by cash hoarding 3 Cash Total debt Net debt 1.45x 1.23x 1.63x 2.04x 2.17x 2.30x 2.17x2.15x2.41x x Net debt / EBITDA 09-16 CAGR 16.5% 15.9% 17.2% Aggregate debt and cash balances of listed Chinese companies RMB trillion Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges
  5. 5. Debt concentrated in a handful of ‘old economy’ industries 4 746 872 1,169 1,467 1,820 2,414 2,431 814 987 1,266 1,415 1,705 1,946 2,251 2,376 2,244 587 716 902 1,113 1,247 1,350 1,406 1,405 1,488 699 840 1,071 1,158 1,181 1,307 1,396 1,416 1,424 650 634 791 1,024 1,181 1,325 1,313 1,199 1,160 385 469 589 727 831 595379 352 326 239 164 320 227 154 119 95 527516 418 403 282289 268 248 257 245 162 173 182 197192 155 144 104 83 66 46 37 156136 152 147 119 92 81 60 45 2012 6,581 5,565 2011 10,740 2010 4,409 2009 3,652 H1 172015 9,768 2016 10,670 7,668 2014 8,806 2013 Information Technology Healthcare Real Estate Consumer Discretionary Telecommunication Services Industrials Energy Utilities Consumer Staples Materials 09-16 CAGR 16.5% 9.1% 30.3% 17.0% 26.4% 6.9% 27.3% 23.7% 10.6% 13.3% 16.5% Total debt balance by industry sector – Listed Chinese companies RMB billion Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges
  6. 6. In most sectors, debt also concentrated in a handful of companies 5 Real Estate 113 53 42 49 76 118 67 130 90 60 209 Utilities 156 119 10 136 Cons. S 16 16 HealthTelecom 726 90 516 113 34 58 26 289 Cons. D 108 IT 175 20 192 91 1,199 Energy 95 106 35 38 106 65 80 42 75 192 43 176 171 518 1,405 37 Materials 1,416 139 51 540 2,414 106 Industrials 143 78 96 79 112 156 160 98 121 2,376 271 74 Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges Total debt balance by company and industry sector RMB billion, 2016
  7. 7. Significant differences in leverage across industry sectors 6 -2 -1 0 1 2 3 4 5 6 7 8 Utilities Average 2010 20132009 201420122011 2015 Industrials IT Materials Real Estate Telecoms Energy H1 17 Healthcare Consumer Discr. Consumer Staples 2016 Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges Average net debt to EBITDA ratio by industry
  8. 8. Almost 30% of debt owed by highly leveraged companies 7 739 901 935 1,205 1,322 1,627 2,044 2,177 1,980 2,391 2,336 2,206 715 741 829 1,268 1,810 1,605 1,568 1,785 2,033 451 1,114 1,338 1,246 1,384 2,314 2,181 2,824 2,491 1,008 819 1,348 1,669 1,904 2,326 2,889 2,825 3,076 579393353424413275 2015 9,768 2016 10,671 10,741 H1 17 7,668 8,804 201420132010 20122011 5,566 4,409 6,580 2009 3,654 4-7x >=7x 2-4x Net cash 0-2x 09-16 CAGR 16.5% 18.4% 15.9% 30.0% 14.0% 9.9% Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges Total debt balance by degree of leverage (net debt to EBITDA ratio) RMB billion Net debt to EBITDA:
  9. 9. Debt concentrated in a handful of highly leveraged companies 8 98 113 42 171 1,785 91 78108 174 2,336 143 0-2x 90 113 130 2-4x 106 Net cash 106 112 139 901 271 176 121 >7x 35 4-7x 75 2,825 40 160 2,824 192 156 209 540 58118 106 119 156 518 Source: Analysis of over 1,300 Chinese companies listed on domestic and international exchanges Total debt balance by company and degree of leverage (net debt to EBITDA ratio) RMB billion, 2016 Net debt / EBITDA:
  10. 10. Closing thoughts • These slides are supporting materials for a LinkedIn article on China’s debt buildup: https://www.linkedin.com/pulse/chinas-debt-time-bomb-ian-mombru • Analysis based on publicly disclosed data of over 1,300 Chinese companies listed on domestic and foreign exchanges Echobox Limited is a Hong Kong based strategy consulting boutique. We work with MNC clients to support their critical business projects across the Asia Pacific Region Please follow us on https://www.linkedin.com/company/echobox-ltd

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China has accumulated an unprecedented debt pile in the 10 years since the global financial crisis. What are the potential consequences of this debt buildup for China and for the global economy?

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