Recently, the Hong Kong financial community has been highly concerned about whether the debt crisis of Mainland Chinese enterprises would be worsened into debt defaults, which will drag down the banking sector in Hong Kong.
According to the statistics of the Hong Kong Monetary Authority, as of the end of June this year, the total amount of mainland-related loans in the Hong Kong banking industry was as high as HK$4.41 trillion, accounting for 16.9% of the total assets of the banking system. The Hong Kong Monetary Authority's semi-annual report pointed out that the market's worries about the impacts of the U.S.-China trade frictions have intensified, causing the Mainland Chinese stock market to fluctuate. This means that Hong Kong banks' mainland-related loan risks are showing signs of deterioration, while the Distance to Default Index shows that this year since April, the credit risk of Mainland Chinese enterprises has risen comprehensively.
Information from Fitch Ratings shows that the total non-bank corporate loans of HSBC, Bank of China (Hong Kong), Hang Seng Bank and Standard Chartered Hong Kong as of the end of 2017 amounted to HK$1.98 trillion, among which non-bank corporate loans outside China were approximately HK$258.5 billion. Fitch's recent report stated that the concentration of mainland loans in Hong Kong and Macau banking systems is the highest in all regions. Although it does not expect the Chinese economy to deteriorate rapidly, once it happens eventually, the Hong Kong banking system will face the pressures of asset quality and liquidity and will become fragile.
The financing difficulties have exacerbated the debt problems of Mainland Chinese enterprises. Since the beginning of this year, the number of offshore U.S. dollar bonds issued by Chinese-funded enterprises in the Mainland at high-interest rate has risen sharply this year, and it is now the top market. Nomura Securities recently published a research report that the pressure on offshore U.S. dollar debt repayments from Mainland Chinese companies is heating up. It is expected that the average quarterly debt service will be as high as US$33.3 billion from the fourth quarter of this year to the end of 2020. Nomura Securities estimates that the outstanding balance of offshore U.S. dollar debt of Chinese companies has risen from US$724.6 billion in the second quarter of this year to US$751 billion in the third quarter, more than double the amount of US$336.3 billion at the end of 2015. In the context of increased credit defaults, the depreciation of the RMB and the U.S. Federal Reserve's interest rate hike, the offshore U.S. dollar debt will be under pressure again.
The more difficult the financing, the higher the financing cost will be. Anbound's tracking of public information shows that as of November 6 this year, the adjusted interest rate of 15 corporate bonds in Mainland China has already exceeded the U.S. bond interest by more than 10%, and the number has exceeded all emerging markets in the world. The total reflects the sharp rise in financing costs and the pressure on corporate debt. Take the Evergrande Group as an example. Last month, it proposed to issue three senior debts with a total of US$1.8 billion through its subsidiaries; the interest rate is as high as 13.75%, the net proceeds are mainly used to refinance existing foreign debt.
The surge in distressed bonds of Chinese companies has even produced a "spill-over" effect, driving the borrowing costs of corporate bonds in emerging markets to rise to a new high in more than two years. If the indicator is like 10% or more than the bond interest in the U.S., the Brazilian companies only have three distressed bonds, second only to China, and only two in Jamaica and Russia respectively. In fact, as of the end of last year, the number of bonds differ from 8% to 9.9% with the U.S. bond interest was only two. Therefore, more and more Chinese corporate bonds are now in deep danger of high financing costs, and they bear huge debt repayment pressure.
Among high-debt Chinese enterprises, real estate enterprises in Mainland China are particularly dangerous. According to the ICE Bank of America Merrill Lynch Bond Index, China's high-yield bonds, which are dominated by Mainland Chinese real estate developers, have nearly doubled their borrowing costs this year, reaching a peak of about 11.2% in the past four years. In the second half of this year, most of the Mainland Chinese real estate developers issued U.S. dollar bond interest rates have been high, the real estate leader Evergrande Group proposed to issue three two to five-year U.S. dollar senior debts, with interest rates as high as 11% to 13.75%, including A five-year bond with a coupon of 13.75% will set a record for the highest level of U.S. dollar debt during the year. The same is true for R&F Properties. According to Bloomberg, R&F's net gearing ratio has risen to 214% by the end of June, ranking the second highest among the 21 major developers tracked by Bloomberg Industries. According to Bloomberg statistics, Mainland Chinese real estate developers will have $18 billion in maturity in the first quarter of next year. If investors demand early repayment of some unmatured bonds, the scale of the matured bonds is expected to double to $36 billion. Standard & Poor's expects that there will be more defaults in real estate developers in the coming year.
The warning of the debt crisis in Hong Kong's banking sector to Mainland Chinese enterprises does not mean that only the Mainland Chinese enterprises in Hong Kong will have a crisis. The more likely scenario is that the Hong Kong banking sector is more focused on corporate debt risk, early warning, and more transparent information, while the Mainland Chinese market is vaguer. In the Mainland Chinese market, the balance of real estate loans in the first half of this year was RMB 35.8 trillion, a year-on-year increase of 20.4%, higher than the 12.7% growth rate of all credit balances of financial institutions. The balance of real estate loans accounted for 27.7% of the total loan balance of financial institutions of RMB 129.2 trillion. At the same time, the real estate non-performing loan ratio is rebounding, which is particularly worth to be noticed in the context of the bank's general non-performing loans. Taking the Agricultural Bank of China as an example, the amount of non-performing loans in the real estate industry rose from RMB 5.789 billion at the end of last year to RMB 8.539 billion in the first half of this year, and the non-performing loan ratio rose from 1.13% to 1.45%.
Final analysis conclusion:
The early warning of the banking sector in Hong Kong is only the beginning. A large number of Mainland Chinese enterprises are generally facing situations where debts are rising, business development is sluggish, and bad debt risks are increasing. If the downward pressure on the economy continues, the external economic environment will remain severe in the short term. In the future, the debt crisis of Chinese enterprises will continue to deteriorate and the risks may become more explicit.
