Chinese companies to scale back on debt on slower growth expectations – S&P

Chinese companies are close to reaching peak debt levels and will likely start deleveraging in 2024 amid modest appetite for borrowing-based expansion, according to S&P Global Ratings.

For at least the next three years, moderating expectations about China's gross domestic product (GDP) gains and slowing productivity growth could curb appetite for capital expenditure, mergers and acquisitions, and debt raising, Ratings said in a June 25 report.

Chinese corporates will experience less growth and less leverage. "For a country that has often relied excessively on debt for economic expansion, this could be a positive shift for corporates' credit fundamentals," said Ratings' China specialist Chang Li.

China's economy, the world's second-largest, grew 4.5% year over year in the first quarter of 2023, falling short of its target of "around 5.0%" in 2023. A slew of weak economic data followed, including real home sales, in April and May. Despite efforts to boost growth, including cuts to short- and long-term interest rates this month, analysts are less optimistic. Nomura, for example, recently lowered its China GDP forecast for 2023 to 5.1% from 5.5%.

Leverage peak

Aggregate leverage of rated China corporations — measured by the net debt as a multiple of EBITDA — could reach just shy of 4.2 times in 2023 and then decline to less than 3.8 times by 2025, closer to 2019 levels, according to a chart in the Ratings report.

"We are nearing a turning point, in which Chinese firms will only have modest appetite for borrowing-based expansion," Ratings said.

Sectors identified by the government as worthy of support would, however, be exceptions.

"The entities most willing to borrow to expand tend to belong to policy-supported areas, such as infrastructure, electric vehicles, clean energy, and technology," Ratings said in the report. "Most other sectors will take a conservative approach to growth, focusing on expansion using internally generated cash."

Appetite for capital expenditure is moderating, Ratings said. The median range of capex spending for the 19 key sectors of the economy is for 5%-10% growth in 2023, which will likely fall to between 0% and 5% in 2024, according to the Ratings report.