Soft landing predicted for China’s debt-laden corporates
The consensus estimate for Chinese corporate earnings between 2015 and 2017 suggests the credit position of companies should improve significantly next year.
Large-cap Chinese corporate revenues will rise about 40% during the period between 2015 and 2017, according to Bloomberg’s average of analyst’s bottom-up forecasts. Higher earnings will improve the credit quality of China’s large corporations.
Earnings before interest, taxes, depreciation and amortization (Ebitda) will jump from around US$300 billion to US$430 billion, analysts predict, mainly due to improvements in energy, materials, information technology and consumer companies. The ratio of total debt to Ebitda, moreover, will fall from around 4 times in 2016 to only 2.6 times in 2017, the analyst consensus predicts.
Factory gate prices slumped during 2014 and 2015 as global raw materials prices sank and China allowed the yuan to rise with its soft US dollar peg. This year’s recovery in producer prices coincides with the jump in corporate revenues.
More than a third of the improvement will come from the energy sector, according to analyst forecasts. Industrials is the only sector where earnings are expected to fall, as China continues to support older and less efficient state-owned enterprises.
The chart below shows the distribution of Ebitda changes among the internationally tradeable components of the Shanghai Composite Index.
If the consensus estimate for earnings is in the right ball park, the credit position of Chinese companies should improve significantly during the next year.
As China fell into deflation during 2014 and 2015, Chinese authorities encouraged state-owned banks to issue more loans to corporations in order to maintain operations and employment in an environment of falling earnings.
The ratio of debt to Ebitda rose alarmingly, from 100% in 2014 to 400% in 2016. As wholesale prices recovered, the rate of lending growth fell back.
This suggests a soft landing for China’s heavily indebted corporate sector rather than the credit crisis that some analysts predict.