Corporate Debt

Corporate debt in Asia to top US, Europe combined


Corporate debt in Asia-Pacific will exceed that of North America and Europe combined by 2016 as the center of gravity shifts to the region, credit rating agency Standard & Poor's (S&P) said in a new report.

China, the region's largest economy, already has more outstanding corporate debt than any other country, having surpassed the U.S. last year, according to S&P.

Corporate debt in the country amounted to $14.2 trillion at the end of 2013, compared with $13.1 trillion in the U.S., and this gap is expected to widen further in the next five years.

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The firm estimates that China's debt needs will reach $20 trillion through the end of 2018 as mainland corporations look to further fuel their expansion.

This is equivalent to one-third of the almost $60 trillion in new debt and refinancing needed globally over this period.

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Growth in corporate debt in Asia-Pacific will lead to an overall increase in risk, since the credit quality of corporate borrowers is generally lower than in North America and Europe, S&P said.

"Consequently, without improved risk assessment among investors and a heightened awareness by regulators of contagion risk, some future financial stress could stem from Asia," it added.

Earlier this year, China's domestic bond market experienced its first-ever default when solar-cell maker Shanghai Chaori Solar Energy Science and Technology Co. missed an interest payment.

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The default was seen as a milestone for Chinese markets, as it turned on its head a long-held assumption that the government would bail out any domestic corporation in danger of defaulting.

US leads Europe

While Asia-Pacific now leads in terms of funding needs for nonfinancial corporate borrowers, a strengthening U.S. economic recovery is bolstering North America's second-place position.

Borrowing in the euro zone, however, is only slowly picking up, as countries in the single currency bloc struggle with sluggish economic growth.Going forward the energy, the Asian real estate and healthcare and North American information technology sectors will drive growth in corporate debt over the coming years, as has been the case in 2008-2013, S&P said.

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The rise in debt in the energy sector is a result of the voracious appetite for energy from emerging economies such as China, along with a desire for energy independence from the U.S. and other major powers around the globe.

The megatrend of global aging has spurred growth in the health care sector.

Meanwhile, in the IT sector, the dramatic declines in the cost of memory and microprocessors have created a world of seamless connectivity leading to a proliferation of new business models, such as social networking.