Chinese companies are likely to start deleveraging in 2024 as their debt levels peak and their willingness to expand their borrowing base is modest, according to S&P Global Ratings.
For at least the next three years, easing expectations of China’s gross domestic product (GDP) growth and slowing productivity growth are likely to dampen appetite for capital spending, mergers and acquisitions, and financing. be. In its June 25 report, the rating said:
Chinese companies will grow slower and become less influential. “For a country that has often relied heavily on debt to expand its economy, this could be a positive change for corporate credit fundamentals,” said Zhang Li, a China expert at a rating agency. Stated.
China, the world’s second-largest economy, grew 4.5% year-on-year in the first quarter of 2023, falling short of its 2023 target of “around 5.0%.” This was followed by a string of weak economic indicators, including real estate sales. April and May. Analysts are less optimistic, despite efforts to boost growth this month, including lowering short-term and long-term interest rates. For example, Nomura recently lowered its 2023 China GDP forecast to 5.1% from 5.5%.
take advantage of the peak
According to the ratings graph, the total leverage (measured as a multiple of net debt and EBITDA) of rated Chinese companies will reach just under 4.2x in 2023, falling to less than 3.8x by 2025 and falling to less than 3.8x by 2019. Reports likely to approach 2019 levels.
“We are nearing a tipping point and Chinese companies will be less willing to expand their business on the basis of debt,” the rating agency said.
Exceptions are those sectors that the government has identified as worthy of support.
“Companies most willing to borrow to expand their business tend to be in policy-supported areas such as infrastructure, electric vehicles, clean energy and technology,” the rating agency said in a report. “Most other sectors will take a conservative approach to growth and focus on expanding with internally generated cash.”
Capital investment appetite has moderated, Ratings said.Median range of capex spending for the 19 major sectors of the economy According to ratings reports, the growth rate is 5% to 10% in 2023, but could slow to 0% to 5% in 2024.
