Large “old industry” companies are at the heart of China's debt problem while “new industry” firms are in better health but struggle to grow, according to a report of Natixis. The report took a sample of the 3,000 largest Chinese listed companies.
State-owned enterprises (SOEs) dominate China's old industries and are more indebted (139 percent leverage ratio) than privately owned enterprises (POEs, 76 percent leverage ratio). The most vulnerable among the SOEs are the smaller companies, of which one quarter are unable to cover the interest expense through earnings.
Among the largest companies, debt levels are much higher in the private sector than for SOEs because of the large share of real estate developers in the sample.
The real estate sector was one of the key beneficiaries of the Chinese credit binge in 2009 and almost one-third of companies in the sector fail to cover their interest expense with their revenue today.
Despite the share of zombies in the real estate sector being double the average in China, there is no sign of a deleveraging cycle in China's real estate arena. The most recent data on loan growth to real estate developers is at 1.5 RMB trillion ($0.23 trillion), which is almost twice the level of 2009.
On the contrary, new industries, like airlines, healthcare, travel and technology, face a higher funding risk despite a better repayment ability and a less leveraged portfolio because they do not have the credit history or size to get bank loans.
Overall, the much laxer monetary policy conducted by the People's Bank of China (PBoC) will further deepen the divergence in China's corporate health. Although the current monetary and fiscal stimulus may postpone the problem that the old industries are facing, their revenue isn't expected to come back to the original level and a widespread restructuring of these old sector companies seems inevitable, the report concluded.
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