China is now leading the corporate debt markets with US$14.2 trillion in borrowings as of the end of 2013, overtaking the U.S. with US$13.1 trillion in corporate liabilities, according to a Standard & Poor's report.
S&P forecasts that by the end of 2018, Chinese companies will borrow US$20 trillion, a third of corporates’ debt requirements globally, a trend supported by the increased willingness of the Chinese authorities to allow more government-related entities to issue debt securities.
One quarter to one-third of China's corporate borrowings comes from the country’s shadow banking sector. This means that as much as 10% (US$4 trillion to US$5 trillion) of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector.
With China’s economy likely to grow at a nominal 10% per year over the next five years, this amount can only increase.
S&P adds that global corporate issuers will seek an estimated $60 trillion in new and refinanced debt by 2018 due to a rising middle class and an aging population. Asia-Pacific, including China, will account for about one-half of that demand, outpacing the U.S. and Europe combined.
The report also indicated that bonds (BCOR) will become a more significant source of financing as opposed to loans. Bonds will increase 3.5% or nearly $3.1 trillion over the next couple of years.
S&P noted that the cash flow leverage of Chinese companies was better than its peers around the world in 2009, but their situation has deteriorated more recently, with the country’s property and steel sectors "of particular concern."
The report also notes that European companies are increasingly accessing debt markets for financing, as bank lending in the region continues to contract.
Capital market funding costs in the region remain at historic lows for higher-rated borrowers and non-financial companies have raised US$530bn in the European bond markets over the past five years.
Although the figure is much lower than the US$3.8 trillion in net new loans raised between 2003 and 2008, S&P believes that banks’ capacity to increase lending will remain limited, and that Europe therefore has the greatest potential for further disintermediation in borrowing.