Chinese companies are slowly falling deeper into a debt quicksand, 75 percent bigger compared to recent government figures, and weighing heavily on the economy's currency market as more deadlines to settle other financial dues loom on the horizon.
Based on a Bloomberg computation, in addition to China's whopping $2 trillion in foreign repayment obligations, Chinese companies at the heart of its rural setting face another wave of debt amounting to $650 billion incurred by overseas enterprises.
Around one-third of this foreign debt is accrued by firms like on-shore mother companies and their affiliates, latest figures reveal. It is estimated that the amount of maturing debt will increase in the next few months, with $63 billion scheduled by the middle of next year alone.
The likelihood of China's mainland corporate entities scrambling to acquire dollars to deal with these burden comes at a time when financial regulators have let the yuan to drop under the 7-per dollar mark in the midst of a trade spat with the United States.
The Chinese economy is now in peril of retaliation of what transpired after its currency devalued in 2015 when offshore-debt servicing added to a sharp drop in China's foreign-currency reserves. According to BNP Paribas SA analyst Ji Tanhi, the country's foreign debt servicing risks can be downgraded "outside its official gauge", pointing out that China's $3.1-trillion offshore currency reserves are "just enough" to cushion these risks.
The People's Bank of China adjusted the country's currency rate at 7.057/USD early Monday, which is better than expected. The yuan pared losses after retreating to an all-time low versus the US greenback.
Countries like China are recommended to have a reserve of at least 30 percent of short-term foreign debt, 20 percent of other offshore payments, 10 percent of exports and another 10 percent of broad funding to contain possible outflow risks, the International Monetary Fund said.
The weight on Chinese firms to settle their debt securities will increase next year, data by Bloomberg showed, and yuan's weakening to a 10-low could worsen the situation.
More rigid policies on refinancing and repayment dues could result in defaults, major cuts in investment flows, and tightening of local credit lines, a report by Nomura Holdings Inc disclosed.
Main onshore firms may also hike their collateral if the yuan behaves unrestrictedly and this would jack up borrowers' financing costs, Guan Tao, erstwhile executive of State Administration of Foreign Exchange, said. He emphasized that the risks should not be exaggerated as these need to be studied carefully.