By Ted Howard
S&P says global corporate demand for Asia-Pacific debt will soar.
While the renminbi has been making a splash in global currency markets lately, another player from the East is expected to take the markets by storm: Asia-Pacific debt. That’s according to an S&P Capital IQ report that suggests global corporate demand for debt and refinancings could run in the $60 trillion range over the next four years.
“The emergence of China as the biggest debt market, gradual disintermediation of banks, faster debt growth in sectors benefitting from the rising global middle class, and an aging world population have resulted in major credit shifts in nonfinancial corporate debt issuance since the 2008 recession,” S&P Capital IQ wrote in its report. “We expect these shifts to continue through the next five years, as corporate issuers will likely seek up to $60 trillion in new debt and refinancing through 2018, an increase from an estimated $53 trillion last year.”
The rise in the use of debt markets worldwide comes on the heels of increased regulations at banks and the general lack of return of most sovereign debt markets. This has been particularly true in Europe where historically companies used banks for funding purposes. As a result investors have turned to corporate debt and the place to go is Asia, China in particular, S&P wrote.
S&P reported that China now has more outstanding corporate debt than any other country, having surpassed the US in 2013. This came, “a year sooner than we expected,” S&P said. “We expect this gap to widen in the next five years. The firm estimates corporate debt in China totaled $14.2 trillion at the end of 2013, vs. $13.1 trillion in the US. “We expect that through the end of 2018, the debt needs of China, with its comparatively high nominal GDP growth, will reach $20 trillion—a full one-third of the almost $60 trillion in global refinancing and new debt needed.” This will be driven by the Chinese government’s preference to allow even more government-related entities to issue debt securities, which could result in deeper capital markets there.
But there is a dark side to the trend, S&P warned, and companies should be aware of the risks before they dive into this seemingly bottomless end of the pool. “We believe [the race for Asia-Pacific debt] will lead to an overall increase in risk, since the credit quality of corporate borrowers in Asia-Pacific is generally lower than in North America and Europe. Consequently, without improved risk assessment among investors and a heightened awareness by regulators of contagion risk, some future financial stress could stem from Asia.”
China’s corporate issuers account for about 30 percent of global corporate debt, S&P said. What is particularly worrisome is that one-quarter to one-third of this corporate debt is sourced from China’s shadow banking sector. “This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector,” S&P said.
“This debt amounts to $4 trillion to $5 trillion,” S&P said. “With China’s economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase.”