The rate of short-term, non-financial corporate bank loans to companies in China has fallen in recent months to less than 1% from a high of 4.8% growth in January 2016.  The tightening—a result of Chinese policymakers’ shift to reduce debt in sectors with excess capacity like iron and coal production—is helping improve China’s overall creditworthiness, notes a recent report in Reuters about data from Moody’s Investors Service and the People’s Bank of China. However, financing activity, particularly for small- and mid-sized-businesses in China, is increasingly turning to nontraditional lenders that are demanding greater yield for riskier assets.

Bond yields for high-rated issuers have increased about 75% from a low in October 2016, while the additional yield that investors demand on lower-rated borrowers more than doubled from the end of last year to about 36 basis points last week, Reuters said. Also, syndicated offshore loan volumes to Chinese companies have dropped in the first four months of this year to less than a third of what they were during the same timeframe the prior year.

The issuance of perpetual bonds that don’t have a maturity date are also on the rise in China, worrying some analysts that this allows firms to conceal their actual debt positions as perpetual bonds can be considered equity instead of debt, Reuters said.

Courtesy: Nicholas Stern, senior editor NACM – National Association of Credit Management