China’s credit market stress is creating a 185 billion yuan (US$26.4 billion) headache for the nation’s private enterprises as they face the worst funding squeeze in more than two decades amid an economic slowdown.

The companies, regarded as the pillar of the world’s second-largest economy, have raised 1.5 trillion yuan from onshore bond sales this year through December 18, according to data provider Wind, failing to match the 1.69 trillion yuan needed to repay maturing debt.

With less than two weeks of working days to the calendar, that is likely to mark the first annual refinancing shortfall since Wind began tracking the market in 1996. That compares with surpluses of 41 billion yuan in 2018 and 652 billion yuan in 2017.

The crunch reflects the fallout from years of state deleveraging campaign to pre-empt a market implosion following years of debt binge. The clampdown has fanned concerns about rising defaults when economic growth is weakening amid a costly trade war with the US.

“Net fundraising by private firms began to trend downward since 2017 as Beijing started the deleveraging campaign” and tightened other funding loopholes, Citic Securities said in a note published on Monday. Companies in the property, industrial and material industries are among the worst affected, analysts Ming Ming and Li Han wrote, citing persistently high borrowing costs.

China's credit crunch

Net capital raised by private firms in onshore bond market (bn yuan)

China’s private enterprises, which account for over 60 per cent of China’s gross domestic product, have produced some shocking delinquencies this year, including those from smokestack industries in Shandong province. In a recent case, Tunghsu Optoelectronic Technology missed three bond payments in a month.

Punitive refinancing costs have also forced companies into undocumented borrowings from their owners or the opaque shadow financing channels.

On average, they have been paying more than 300 basis points above the cost for state-owned China Development Bank in the 12 months through September, according to Citic Securities. The spread was only around 210 basis points at the start of 2018.

In contrast, state-owned enterprises have been largely insulated, according to Wind data. They have raised 16.9 trillion yuan this year, a 7 per cent increase over 2018, and more than the 13.1 trillion yuan of maturing debt. In a rare instance, however, state-owned Peking University Founder Group has missed bond payments.

The financing gap may pose a problem for offshore investors who have bought some of the companies’ foreign-currency debt in recent years. Chinese companies have US$145 billion of bond principals coming due in 2020, almost treble the amount this year, according to Wind data.

“It will be a challenge for the companies to figure out how to ensure redemption,” said Frank Zheng, head of international fixed income at China Asset Management, one of the country’s biggest money managers.

While some companies such as Tewoo Group and Xiwang Group have recently upset the market with non-payments, Zheng believes the risk is manageable.

Following state directives in 2017 that barred offshore investments in areas such as real estate and sports clubs, Chinese companies have dialled back mergers and acquisitions in overseas markets in the past two years.

The slower outbound M&A deals means their debt troubles did not grow larger at the least, Zheng said. He is overall confident that default risks are manageable as the market has priced in potential delinquencies. Looser monetary policy could also ease borrowing costs, he added.

In the onshore bond market, however, the nation’s private enterprises may take longer to recover. Their financing conditions have barely improved this year despite Beijing’s repeated vow of support, Citic Securities said in its report.

“It will be a long and tough road to relieve their (funding) troubles,” it added.