Corporate debt poses another major threat for Chinese Economy

Corporate debt poses another major threat for Chinese Economy

The massive $16.1 trillion corporate debt in China will be a major issue for the slowing economy of the Asian manufacturing giant. The recent turbulence in the Chinese stock market has been controlled by the authorities with strict controls but corporate debt issue could cause another shock for the investors and management of companies in China.

The corporate debt of $16.1 trillion currently stands at 160 percent of Chinese GDP. With debt ratio at almost twice the percentage of GDP in the United States, Chinese companies with higher debt to valuation ratio could see their stock valuation declining over the coming weeks.

The study involving 1,400 companies in China, conducted by Thomson Reuters has found that most of the companies are facing high interest rate outgo due to rising debt.

According to S&P estimates, the corporate debt in China is expected to rise to $28.8 trillion over the next five years.

The government can only help companies secure more money through banks but paying that back depends on the performance of the companies. So, analysts feel that there is very little Chinese government can do to improve the situation with corporate debt in China. The paying back capacity of the companies will directly depend on their financial performance. With the Chinese economy facing pressure, it is expected to touch a 25-year low this year.

Banks in China issued $1.28 trillion in new loans in June.

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