HONG KONG (Reuters) – Chinese companies will consume nearly two-thirds of new credit raised globally by 2020 as the world’s second-largest economy leans on the corporate sector to support growth, said a report from S&P Global published on Thursday.
The report highlighted China’s opaque and ever-expanding corporate sector and rapidly rising U.S. leveraged finance as key tail risks for global credit, with outstanding debt forecast to expand by half to $75 trillion by 2020.
China’s share in the global total would rise to 43 percent from the current 35 percent.
S&P expects the two tail risks for global credit to persist as governments and central banks are likely to continue their expansive monetary policies to lift inflation and growth.
“Central banks remain in thrall to the idea that credit-fuelled growth is healthy for the global economy,” the report said.
“An increasing proportion of companies are becoming highly leveraged, raising questions over their long-term debt sustainability,” it said, highlighting the weakening corporate credit quality worldwide.
A global credit quality study conducted by the agency found that at least 40 percent of the 14,400 non-financial corporates included in the survey were considered highly leveraged. That would put them in the weakest category of a six-point financial risk profile scale.
The base case for an orderly credit correction over several years would be a ‘slow burn’ scenario where weak companies fall over gradually, S&P said.
China, which would account for 45 percent of the total global debt demand and 62 percent of new credit demand during 2016 to 2020, the reliance on debt for growth continues despite stretched parameters, it said.
“The downside risks are material, especially if Chinese authorities lose their grip on rebalancing the economy.”
The rating agency also highlighted the risks undertaken by investors faced with a fast expanding pool of bonds globally whose yields have shrunk below zero as markets fret about economic growth.
“Indeed, investors are buying speculative-grade corporate debt, including those from emerging markets, and extending maturities to generate positive yields … the reward is becoming increasingly unsustainable.”
(Reporting by Umesh Desai; Editing by Jacqueline Wong)