Research
Terence Chan, CFA
Melbourne+61-3-9631-2174
terry.chan@spglobal.com

Global Debt Leverage

Can China Escape Its Corporate
Debt Trap?
Oct. 19, 2021
This report does not constitute a rating action

Key Takeaways− Too big to ignore. China's corporate debt of US$27 trillion is equivalent to 31% of
the global total, making it too big for investors to ignore. Its debt-to-GDP ratio of
159% is markedly higher than the global rate of 101% and twice the U.S.' 85%,
implying substantial financial and economic contagion risk.
− Policy trigger. The central government's decision to reduce financial risk in theeconomy, especially in speculative activities (for example, real estate), hastriggered liquidity stress for highly leveraged corporates.
− Three-fifths of Chinese entities are in the global quartile with the worst risk.
We estimate, based on a 5,000-plus entity sample, that 58% of China's
corporates are highly indebted (the global quartile with the highest credit risk).
This is sharply above the global sample's 38%.
− Half are in construction or property. 45% of the sampled China corporate debt isin construction and engineering, and real estate. Of this, we would categorize
three-quarters as highly indebted.
− No pain, no gain. With the Chinese government's resources, the corporate debt
trap could be overcome--but not without pain for borrowers and lenders. In a"what-if" scenario where about 5% of existing debt is retired (amortized)
annually, the debt-to-GDP ratio could ease to the global average by 2030.
The recent troubles of property group China Evergrande Group have rattled investors. Should
Evergrande default, there may be contagion effects for other developers, home prices, and theeconomy. Evergrande's cash flow troubles foreshadow what could go wrong for liquiditychallenged Chinese corporates (see "Credit FAQ: Evergrande Default Contagion Risk--Ripple Or
Wave?" published Sept. 20, 2021, on RatingsDirect).
S&P Global Ratings believes that Evergrande hints at credit strains simmering among Chinese
corporates, and a strong resolve by the government to tackle this issue. We probe these pressuresin a survey involving 25,000-plus global entities that reveals that the leverage levels of China's
corporate sector are significantly above the global average. It is a US$27 trillion problem that isincreasingly getting the attention of Beijing.

spglobal.com/ratings

Eunice TanHong Kong+852-2533-3553
eunice.tan@spglobal.com

Ratings
Corporates
Christopher Lee
Hong Kong+852-2533-3562
christopher.k.lee@spglobal.com
Charles Chang
Hong Kong+852-2533-3543
charles.chang@spglobal.com
Li Chang
Beijing+86-10-6569-2705
chang.li@spglobal.com

Financials and Sovereigns
Vera Chaplin
Melbourne+61-3-9631-2058
vera.chaplin@spglobal.com

Financial Institutions
Harry Hu, CFA
Hong Kong+852-2533-3571
harry.hu@spglobal.com

Sovereign
KimEng Tan
Singapore+65-6239-6350
kimeng.tan@spglobal.com

Economics
Vishrut Rana
Singapore+65-6216-1008
vishrut.rana@spglobal.com

Contents
1. Largest in the world

2

2. Leverage trend

3

3. Riskier than global

5

4. Indebted industries

8

5. Current focus

10

6. Escaping the trap

11

Appendix: Sampling

16

Can China Escape Its Corporate Debt Trap?

Should investors be concerned about China's corporate debt?
Simply put, yes, because China has a very large amount of corporate debt. In fact, China's
corporates contribute almost a third (31%) of global corporate debt (see chart 1). In contrast, thecountry only contributes a fifth of global GDP (see chart 2). Consequently, China's corporate debtto-GDP leverage ratio of 159% (June 2021) is one of the world's highest (see chart 3). The growthrate of debt remained high even in early 2021 (see chart 4), even as China recovered from theworst of COVID.
Chart 1

Chart 2Global Nonfinancial Corporate Debt By Geography, June
2021

Gross Domestic Product By Geography, June 2021

Europe, 27%

China, 19%

China, 31%
Europe, 24%

U.S., 25%
Other
emerging
markets, 24%

Other emerging
markets, 14%

U.S., 20%
Other mature
markets, 1%

Other mature
markets, 1%Japan, 7%

Corporates include both private sector and government-related. Source: International Instituteof Finance.

Japan, 6%

Source: International Institute of Finance.

Chart 3Chart 4

Nonfinancial Corporate Debt-To-GDP

Corporate Debt Change (Year-On-Year)

159

101
103
112
116

15

15
10
5

60

Japan
GlobalOther emerging markets

20

%

85

76

%

90

85

93
96
103
101

150
120

U.S.
Europe
China

101
103
114
116

150

180

GlobalEurope
China
160

U.S.
Other emerging markets
Japan

30

0

0

-5

8
5

4

5

9

10

11 12

13
10
7

6

2

8

9

1
0

Dec. 2019
Source: International Institute of Finance.

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Dec. 2020

June 2021

2019

2020

June 2021

Note: Debt in U.S.-dollar-equivalent except for China and Japan, which is in local currency.
Source: International Institute of Finance.

Oct. 19, 2021

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Can China Escape Its Corporate Debt Trap?

But haven't Chinese corporates been highly leveraged for years
already?
Yes. We highlighted the buildup of China's corporate leverage as far back as 2015 (see "Global
Corporate Credit: Twin Debt Booms Pose Risks As Companies Seek US$57 Trillion Through 2019,"
July 16, 2015).
Sector leverage. The run-up in leverage did stabilize mid-decade (see chart 5) as the Chinese
government curbed excessive debt growth. The efforts were only partially successful withcorporate leverage remaining stubbornly high. While household leverage did more than double inthe mid-to-late 2010s, its level is comparatively low, as is that of the general government (seechart 6). Comparisons of the absolute size of China's corporate, government, and household
sector debt against those of other countries are shown in charts 7-9.
China's heavy-investment economic structure underpins its high corporate leverage. Furthermore,
its large manufacturing sector and international trading sector (relative to GDP) calls for sizable
asset financing and trade credit, respectively. Easy domestic financing conditions andgovernment policy encouragement to fund corporate and government investment projects via
credit further prop up leverage.
Chart 5Chart 6China Corporate Debt-To-GDP

China Gross Debt-To-GDP

200

Government (left scale)Household (left scale)
Total corporates, government and households (right scale)

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Q2 2021

0

Q2--Second quarter. Source: International Institute of Finance.

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400

75

300

50

200

25

100

0

0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021p

50

100

Total (%)

100

Sector (%)%

150

p--Projection. Source: 2001-2006: International Institute of Finance; 2007 onwards, S&P Global
Ratings.

Oct. 19, 2021

3

Can China Escape Its Corporate Debt Trap?

Chart 7

Corporate Debt (Trillion US$), June 2021

AU--Australia. CH--Switzerland. NL--Netherlands. SE--Sweden. U.K.--United Kingdom. All countries below US$1 trillion are listed in the appendix of this report. Source: International Institute of
Finance.

Chart 8Gross Government Debt (Trillion US$), 2021f

f--Forecast. CA--Canada. U.K.--United Kingdom. All countries below US$1 trillion are listed in the appendix of this report. Data source: S&P Global Ratings' Sovereign Risk Indicators, July 12,
2021.

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Can China Escape Its Corporate Debt Trap?

Chart 9Household Debt (Trillion US$), 2021f

f--Forecast. NL--Netherlands. U.K.--United Kingdom. All countries below US$1 trillion are listed in the appendix of this report. Data source: Banking Risk Indicators, May 12, 2021, except Czech
Republic, Estonia, Ghana, Latvia, Lithuania, Lebanon, Pakistan, Slovakia, United Arab Emirates, and Vietnam; International Institute of Finance.

How does China's corporate risk distribution compare with that of the
global average?
It's worse. Based on a sample of corporates, we concluded that China's corporate sector has ahigher risk profile than that of the global average.
Global corporate sampling. We examined the financials for the first half of fiscal 2021 for asample of 25,210 global corporates, of which 23% (5,773) are China-based (data source: S&P
Global Market Intelligence). Using this sample, we conducted a desktop scenario analysis bylooking at each corporate's geography, industry, and financial risk (i.e., we did not conduct a rating
exercise; see 'Appendix' for details). We then categorized each according to four buckets ofindebtedness: low, moderately low, moderately high, and high.
We define high as a ratio of funds from operations to total debt as less than 12%, or debt to
EBITDA as more than four times (see Appendix).
These categorizations are on a stand-alone basis and do not consider other credit factors such as
management quality or potential support from the borrower's corporate group and thegovernment.
High indebtedness. From a global perspective, China's corporates make up more than half (21%of 38%) of the global corporates we would categorize as having high indebtedness (see chart 10).
This finding is not surprising, as we had in 2012 highlighted that "while the sovereign is very strong
and the major banks [are] adequate on a stand-alone basis, the stand-alone financial risk profiles
on China's largest companies are on average relatively weak" (see "China Credit Spotlight:
Significant Financial Risks Fan The Flames For China's Top Corporates," Sept. 11, 2012).
Sample debt size. The sample is statistically biased as it is self-selected. The financial data are
drawn only from those corporates disclosing financials for the first half of fiscal 2021 (87% of thesample are listed). The global sample debt of US$42 trillion is equivalent to 49% of the US$86
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Can China Escape Its Corporate Debt Trap?

trillion in global corporate debt (data source: International Institute of Finance) (see chart 11).
Meanwhile the China sample debt of US$15 trillion is equivalent to 56% of the US$27 trillion in
Chinese corporate debt. The corporate population, which in China's case would include over
100,000 state-owned enterprises (SOEs), could be more or less risky than the sample.

Chart 10Chart 11

Global Corporate Sample Risk Mix (Debt-Weighted),First Financial Half-Year 2021

Sample Debt As Percentage Of Population

50

China
EuropeLatin America

Asia-Pacific ex-China
U.S.
Other

% of sample

2

30

10
0

Sample for
China, 18%

Rest of world
population,
38%

Rest of China
population,
13%

38
33

40

20

Sample forrest of world,
31%

19
1

9
4
2
2
1

Low

1
6
4
4
4

1
8

1

1
4
4

7

8
5

21

10

Moderately low Moderately
highIndebtedness

High

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

Source: S&P Global Market Intelligence.

Geographic comparison. To keep China's corporate risk profile in perspective, it should be notedthat global corporate leverage has been trending up for decades, amid a so-called "debt supercycle" (see chart 12). The global sample indicates a median risk profile of moderately highindebtedness (see chart 13).
Among the major economies, China's corporate risk distribution is the most negatively skewed(see chart 14) whereas that of the U.S. appears to be more of a normal distribution (see chart 15).
Europe (see chart 16) has a somewhat riskier distribution than the U.S. while Asia-Pacific exChina (see chart 17) tracks the global average.

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Can China Escape Its Corporate Debt Trap?

Chart 12Chart 13

Global Nonfinancial Corporate Debt-To-GDP (%)

Global Sample, First Financial Half-Year 2021

Debt/GDP (%)

Linear (Debt/GDP (%))

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
June 2021%% of sample

105
100
95
90
85
80
75
70
65
60

45
40
35
30
25
20
15
10
5
0

38
33

19
9

Low

Moderately
low

Moderately
high

High

Indebtedness

Source: International Institute of Finance.

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

Chart 14Chart 15

China Sample, First Financial Half-Year 2021

U.S. Sample, First Financial Half-Year 2021

70
60

28

30

50
40
27

30
20
10

34

35
% of sample% of sample

40

58

12
3

25
20

20

19

15
10
5

0

0
Low

Moderately low Moderately
highIndebtedness

High

Low

Moderately low Moderately
highIndebtedness

High

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

Chart 16

Chart 17

Europe Sample, First Financial Half-Year 2021

Asia-Pacific Ex-China Sample, First Financial Half-Year
2021

50
45
40
35
30
25
20
15
10
5
0

44

22

23

11

Low

Moderately low Moderately
high

High

Indebtedness
Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

spglobal.com/ratings% of sample% of sample

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

45
40
35
30
25
20
15
10
5
0

39
30
21
9

Low

Moderately low Moderately
highIndebtedness

High

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

Oct. 19, 2021

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Can China Escape Its Corporate Debt Trap?

Are China's construction and property sectors the most indebted?
Based on our sampling, yes, the construction-and-engineering sector is the most indebted, withreal estate about average (see chart 18). Other industry sectors that have similar (or higher) levels
of indebtedness to the real estate sector are transportation, retail, leisure, services, consumer
goods, and pharmaceuticals.
Chart 18

China Corporate Sectors (Alphabetical): Mix Of Indebtedness
Low

Moderately low

China sample (5773, $15093B) 3% 12%
Aerospace and defense (41, $111B)

Business and consumer services (200, $463B) 4% 2%

64%

31%

Capital goods (550, $299B)

17%

Containers and packaging (25, $5B)

59%

18%

6%

91%

8%

Forest and paper products (36, $56B)

13%

Leisure, media and entertainment (232, $267B)

28%

54%

18%

Health care services (103, $65B)

40%

35%

13%

67%

8% 4%

Metals and mining (298, $1327B) 2%

52%

Oil and gas (81, $467B) 0%

67%

Pharmaceuticals (221, $150B)

17%

Real estate (589, $2936B)

18%

Retail (240, $644B)

31%

58%

25%

57%

35%

79%

11%

Technology (565, $353B)

30%

19%

Telecommunications (9, $31B)

4%

13%

1% 12%
Transportation (222, $1681B) 1%

0%

17%

16%

75%

6%

10%

24%

44%

23%

Construction and engineering (1007, $3711B)

50%

31%

16%

Consumer goods (278, $244B)

31%

12%

28%

30%

Chemicals (354, $459B)

18%

58%

12%

11%

29%

17%

53%

Building materials (97, $142B)

13%

27%

61%

Auto suppliers (161, $63B)

Utilities (254, $1275B)

39%

35%

6%

Auto OEM (29, $121B)

6%

56%

14%

20%

High

58%

27%

25%

Agribusiness and commodity foods (181, $225B)

Moderately high

0%

3%

86%

4%

69%

20%

40%

60%

80%

100%

Numbers in brackets after sector name refers to sector sample count and debt amount (US$ billion). Ratios are computed on a debt-weighted
basis. OEM--Original equipment manufacturer. B--Billion. Source: S&P Global Market Intelligence.

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Can China Escape Its Corporate Debt Trap?

Debt mix by industry. Our examination of the 2020 annual reports of the top 15 Chinese banks
indicate that these banks' loan mix is 55% to corporates and 42% to households, while 3% arediscounted bills (see chart 19, and "Banking Industry Country Risk Assessment: China," Aug, 9,2021). In turn, transportation, storage, and postal services; manufacturing; and leasing andcommercial services make up 51% of the corporate loan book (see chart 20). The real estate andconstruction related loan exposures are 11% and 4%, respectively. Meanwhile, the latest financial
stability report of the People's Bank of China (the central bank) said the banking sector's exposure
to property developers was 8% of total loans at end-2020.
Chart 19

Chart 20

Banking Sector's Loan Composition In 2020

Banking Sector's Corporate Loan Breakdown By Industry
In 2020
Discounted
bills, 3%

Science, education, culture
and sanitation, 1%

Mining, 3%

Others, 5%Construction, 4%

Transportation,
storage and postal
services, 17%Finance, 4%Wholesale andretail, 9%Householdloans, 42%

Manufacturing,
17%
Real estate,
11%

Corporateloans, 55%

Source: Top 15 Chinese bank loan segment information, 2020 annual reports, S&P Global
Ratings.

Production andsupply ofelectricity,heat, gas andwater, 8%

Water, environment and public
utility management, 8%

Leasing andcommercial
services, 17%

Source: Top 15 Chinese bank loan segment information, 2020 annual reports, S&P Global
Ratings.

Sample findings. In our sample, construction-and-engineering and real estate sectors have thelargest amount of debt. The two sectors make up a combined 45% of the corporate sample debt
(see chart 21). The real estate sector comprises 20% of sample debt, which roughly tracks its
contribution to GDP. Drilling down into these two sectors' samples, we find that the engineeringand construction (E&C) sector has a higher proportion of highly indebted entities than real estatewith a ratio of 91% versus 57% (see chart 22). Given the linkages of these two sectors, we are notsurprised that investors are concerned about Evergrande, the wider property and construction
sector, and its economic spillover to the economy. In passing, we note that most of the E&C
entities we rate have diversified end-market exposure, spanning railways, highways, municipal
works, housing, and power projects.

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Can China Escape Its Corporate Debt Trap?

Chart 21

Chart 22

China Corporate Sample: Debt Mix By Sector

China Construction And Real Estate Sample, First
Financial Half-Year 2021

Retail andrestaurants(240), 0.6

Transportation
infrastructure(158), 1.2
Utilities (254),
1.3

Real estate developers

Engineering andconstruction (1007),
3.7

Real estatedevelopers(589), 2.9

100

91
76

80
57

60
35

40

20

20
0

0

0

0

Low

Metals and mining (298), 1.3

Note: Numbers in brackets refer to sector sample count. Numbers outside the brackets are thetotal debt of the sector in U.S.-dollars trillion. Source: S&P Global Market Intelligence.

Combined two sectors

Engineering and construction% of sample

Other 23 industry
sectors (3227), 4.0

9

4

8

1

Moderately
low

Moderately
high

High

Indebtedness
Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

But why is China's high corporate leverage coming into focus now?
China's corporate leverage has been a challenge for the better part of a decade. China's central
government has been long aware about this. The situation is coming to a head now primarily
because of the government's policy to reduce financial risk, especially of speculative activity, in its
economic system. Such reduction is expected to not only affect the real estate sector but also
corporates and financial institutions in general. This policy stance requires coordination among
government bodies to avoid missteps, as may have occurred in recent power brownouts throughthe country.
The decision to reduce system financial risk has been made against the backdrop of a years-long
downward trend of China's GDP growth rate (see chart 23). Chinese authorities have recently tilted
in favor of even more market discipline (allowing the inefficient and unsustainable companies tofollow their natural course to default). We had in 2019 discussed that China's growth rate is likely
to slow even further this decade (see "Economic Research: China Credit Spotlight: The Great Game
And An Inescapable Slowdown," Aug. 29, 2019).

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Can China Escape Its Corporate Debt Trap?

Chart 23

Chart 24

China Corporate Debt Growth Versus Nominal GDP
GrowthCorporate Debt Growth Over Nominal GDP Growth

Nominal GDP growth (%)

5

Corporate debt growth (%)

40
4

20

Times

%

30

3
2

10

1

0

0

f--Forecast. Debt growth is in domestic currency. Source: GDP--World Bank except 2021f,
f--Forecast. Debt growth is in domestic currency. Source: GDP--World Bank except 2021f, S&P
which comes from S&P Global Ratings' "Sovereign Risk Indicators," July 13, 2021; debt--Bank
Global Ratings' "Sovereign Risk Indicators," July 13, 2021; debt--Bank for International
for International Settlements except 2021f, which uses actual first quarter 2021 data as a proxy. Settlements except 2021f, which uses actual first quarter 2021 data as a proxy.

Middle income trap. This raises the possibility the country getting caught in a "middle-income
trap." This is where a country is unable to increase its GNP per capita above the middle-income
level, due to a poor transition to more productive and innovative industries. Indeed, China's
corporate debt has for well over a decade mostly grown faster than its contribution to GDP (asindicated in chart 24, in which the trend line largely stays above "1 times").

Can China escape its corporate debt trap?
Yes, but only with significant pain and perseverance.
Debt trap. The classic debt trap is where debt growth has fueled income growth over an extended
period. It then becomes difficult for borrowers and authorities to cut back the former without
sacrificing the latter.
Three red lines. In August 2020, the Chinese government established the so-called "three redlines" policy on major property developers. The measure limits the entities' debt growth byrequiring these companies to adhere to: (1) a 70% ceiling on liabilities to assets, excluding
advance proceeds from projects sold on contract; (2) a 100% cap on net debt to equity; and (3) acash to short-term borrowing ratio of at least one. Failure to meet all three requirements would
cap a developer's annual debt growth rate at 0%.
Balance sheet gearing. Could the authorities require a similar cap on net debt to equity
requirement for all major corporates, not just property developers? Possibly, but we are uncertain
whether that it will achieve the twin goals of lower debt and acceptable economic growth. Our
sample of China corporates show an adjusted debt-to-equity ratio of 73% (we compute adjusted
debt by deducting 75% of cash equivalents from gross debt) which is already better than the 77%
global average (see chart 25).

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Can China Escape Its Corporate Debt Trap?

Not equity, productivity. We suggest the problem is more to do with productivity than the lack ofequity, at least at the macro level. The return on capital (EBITDA over gross debt plus equity) for
the China sample was 7.1% for first financial half-year 2021, a third lower than the global pool's
11.7% (see chart 26).
Chart 25

Chart 26

Adjusted Debt/Equity: China Sample Versus Global

EBITDA/Gross Debt Plus Equity: China Sample Versus
GlobalChina sample

Global sample

China sample

85

Global sample

14
12

80

10
75
%

%

8

70

6
4

65

2

60

0
2017

2018

2019

2020

1st half2021

Note: Adjusted debt is gross debt less 75% of cash equivalents. Ratios are computed on a debtweighted basis. Source: S&P Global Market Intelligence.

2017

2018

2019

2020

1st half2021

Note: Ratios are computed on a debt-weighted basis. Source: S&P Global Market Intelligence.

Creative destruction. It appears that China's central government is bent on a form of "creative
destruction" (destroying the old to make way for the new). Increasingly, we see the government
preferring more market-based solutions in resolving over-leveraged private sector firms throughcorporate actions such as debt restructurings. Lenders, among other stakeholders, are mostaffected. We could see higher levels of problematic assets as this policy direction continues topick up momentum. The country's banks can weather these changing conditions with theirreasonable provisioning and capital reserves. This capacity is uneven, given years of credit
divergence and lingering pandemic issues have already eroded the financials of some of theweaker banks. While recent policies may test banking sector resilience, we can also expect the
government to step in if signs of financial instability emerge.
What-if scenario. If China is to bring its corporate debt-to-GDP to almost the current global ratioof 101% from China's current 159% (see chart 28), entities would need to pay down or write down
about 5% (specifically, 4.7%) of the initial debt amount each year, on an amortizing basis. In sucha scenario, China's corporate adjusted debt-to-EBITDA could improve to the current global ratio of
3.4x, from China's current 5.3x, by 2030 (see chart 27). Note in this scenario, we do not presume
that there is no new debt. Rather it is presumed that the annual growth rates of EBITDA and new
debt are at the same rate during the period.

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Can China Escape Its Corporate Debt Trap?

Chart 27

Chart 28

Scenario: China Corporate Sample's Adjusted
Debt/EBITDA

Scenario: China Corporate Debt-To-GDP

China

Global (1FH 2021)

China

6

Global average (June 2021)

180
160
140
120
%

Times

4

100
80
60

2

40
20
2030p

2029p

2028p

2027p

2026p

2025p

2024p

2023p

2022p

2030p

2029p

2028p

2027p

2026p

2025p

2024p

2023p

2022p

2021p

Note: Ratios are computed on a debt-weighted basis. p--Projected. 1FH--Financial first half.
Source: S&P Global Market Intelligence.

2021p

0

0

Note: Ratios are computed on a debt-weighted basis. p--Projected. Source: International
Institute of Finance.

Managing less-productive debt. Is the above scenario feasible? It would require the central
government to either allow or put this into effect. It would not be the first time that the authorities
have addressed less-productive debt in the system. Note that less-productive debt does not equal
nonperforming loans (NPLs), just that the productivity is low. The last major exercise in dealing
with NPLs was after the 1997-1998 Asian financial crisis when the government set up four stateowned distressed asset management companies to take over NPLs worth about Chinese renminbi(RMB) 1.4 trillion from the major state-owned commercial banks (see "China Banking's Two
Faces," Nov. 25, 2003). In 2002, we had estimated that the actual NPLs in China's banking system
could be as high as 50% of total loans (see "China Banks Face Decade of Problem Loans UnlessMore Equity Injected," May 9, 2002). By 2012, China had managed to reduce the nonperforming
asset ratio down to 1.6% (see "Banking Industry Country Risk Assessment: China," Jan. 9, 2014).
This is not to underestimate the size of the task. It is going to be a long and hard journey.

Digital design: Halie Mennen, Evy Cheung
Editor: Jasper Moiseiwitsch

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Can China Escape Its Corporate Debt Trap?

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Can China Escape Its Corporate Debt Trap?

Research Contributors
Christine Ip, Hong Kong, + 852-2532-8097; christine.ip@spglobal.com
Yucheng Zheng, New York, +1-212-438-4436, yucheng.zheng@spglobal.com
Sushant Desai, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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Can China Escape Its Corporate Debt Trap?

Appendix: SamplingThis appendix discusses the assumptions, data sources, and approach adopted in this article.
Sample source ofWe draw our global sample of nonfinancial corporate financial data from S&P Global Market
corporate financials Intelligence's Capital IQ database. The sample comprises 25,210 corporates, of which 87%
are listed and 91% are unrated. The Chinese sub-sample comprises 5,773 corporates.
The sample total debt of US$42.2 trillion is equivalent to about 49% of estimated global
corporate debt at end-June 2021 (source of global nonfinancial corporate debt amount:
International Institute of Finance).
Sample sector
scope

The global sample is categorized into 23 industry sectors: aerospace and defense;
agribusiness and commodity foods; auto original equipment manufacturer (OEM); auto
suppliers; building materials; business and consumer services; capital goods; chemicals;
consumer goods; containers and packaging; engineering and construction; forest and paper
products; health care services; leisure, media and entertainment; metals and mining; oil andgas; pharmaceuticals; real estate; retail; technology; telecommunications; transportation;and utilities.
The engineering and construction sector includes commercial construction and engineering,
construction support services, heavy construction, prefabricated buildings and components
and specialty contract work subsectors.
The real estate sector includes real estate development, real estate operating companies
and real estate services subsectors.

Sample geographic The global sample is drawn from 60 geographies, which we believe is a good representation
scopeof the global nonfinancial corporate population.
–

Asia-Pacific: Australia (AU), mainland China (CN), Hong Kong (HK), India (IN), Indonesia(ID), Japan (JP), Korea (KR), Malaysia (MY), New Zealand (NZ), Pakistan (PK), Philippines(PH), Singapore (SG), Taiwan (TW), Thailand (TH), Vietnam (VN).

–

Europe: Austria (AT), Belgium (BE), Cyprus (CY), Czech Republic (CH), Denmark (DK),
Estonia (EE), Finland (FI), France (FR), Germany (DE), Greece (GR), Hungary (HU), Ireland(IE), Italy (IT), Latvia (LV), Lithuania (LT), Luxembourg (LU), Malta (MT), Netherlands (NL),
Norway (NO), Poland (PL), Portugal (PT), Russia (RU), Slovakia (SK), Slovenia (SI), Spain(ES), Sweden (SE), Switzerland (CH), Turkey (TR), Ukraine (UA), United Kingdom (UK).

–

Latin America: Brazil (BR), Chile (CL), Colombia (CO), Mexico (MX), Peru (PE).

–Middle-East, Africa. Egypt (EG), Ghana (GH), Israel (IL), Kenya (KE), Nigeria (NG), Saudi
Arabia (SA), South Africa (ZA), United Arab Emirates (AE).

–North America: Canada (CA), United States (US).

The data have a bias toward nonfinancial corporates that had reported their first financial
half-year 2021 financials at the date of sample extraction. Consequently, it's not surprising
to see some geographic regions over or under-represented on a debt-weighted basis in thesample compared with the global population (source of global nonfinancial corporate
population debt amount: International Institute of Finance).
Notional credit risk For this exercise, we determined notional credit risk levels for each corporate in the sample.
In this respect, our evaluation of the country, industry, and financial risks of the corporate
levelssample is partially, but incompletely, borrowed from our Corporate Ratings methodology (see"Criteria/ Corporates/ General/ Corporate Methodology," Nov. 19, 2013). It is important tonote that information limitations do not permit full application of such methodology.
We categorized the evaluations into four notional credit risk levels: "low indebtedness","moderately low indebtedness", "moderately high indebtedness", and "high indebtedness"
as a proxy for credit risk.

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Can China Escape Its Corporate Debt Trap?

Key ratios andthresholds

In this exercise, we assess financial risk based on the following ratios: debt-to-EBITDA
and FFO-to-debt.
–

EBITDA is earnings before interest, tax and depreciation and amortization
expenses, over a financial year.

–

FFO is funds from operations over a financial year; it is calculated by deducting net
interest expense and tax expense from EBITDA.

–

Debt here is adjusted debt where we deduct 75% of cash equivalents from grossdebt.

All sectors except for real estate and utilities
Category

FFO to debt (%)

Debt to EBITDA (x)Low indebtedness

Greater than 45

Less than 2Moderately low indebtedness

30-45

2-3

Moderately high indebtedness

20-30

3-4

High indebtedness

Less than 12

Greater than 4

Category

FFO to debt (%)

Debt to EBITDA (x)Low indebtedness

Greater than 15

Less than 4.5

Moderately low indebtedness

9-15

4.5-7.5

Moderately high indebtedness

7-9

7.5-9.5

High indebtedness

Less than 7Greater than 9.5

Category

FFO to debt (%)

Debt to EBITDA (x)Low indebtedness

Greater than 23

Less than 2Moderately low indebtedness

13-23

3-4

Moderately high indebtedness

9-13

4-5

High indebtedness

Less than 9Greater than 5

Real estate

Utilities

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