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Quality erodes as more Chinese debt comes to market

Chinese companies have issued nearly $2 trillion in debt in 2017, about $860 billion more than calendar year 2016 and 250% of what was issued in 2015. The ramp up in leverage has been primarily domestically funded as the corporate need for capital has been hamstrung by restrictions on equity issuance, with a relatively small amount of debt sold outside the country. Bloomberg reports that foreign funds hold only about 2% of Chinese debt, and only about 5% of that debt is covered by ratings agencies, which started rating the debt in 2011.

Among rated issues, only 28% of 2017 bonds were given an investment-grade rating, compared to an average 57% in 2016 and 2015. The shift in distribution is a reflection of how credit agencies view the buildup in debt despite positive outlooks for growth, particularly as debt issuances become a larger multiple of the GDP world’s second-largest economy.