* Chinese firms delay 59 bln yuan in bond sales since Nov
* Many firms say they didn't really need the money
* Higher funding costs discourage wasteful investment
* Rising interest rates hit private firms hardest
By Gabriel Wildau
SHANGHAI, Jan 6 Concern about China's debt load
is mounting, but there are signs that higher interest rates may
finally be helping the country get to grips with the wasteful
investment and excessive borrowing that has fuelled the economy
since the global financial crisis.
An official audit showing a big jump in Chinese government
debt since 2010 caused some alarm last week, but in fact
corporate debt may present an even bigger risk.
The audit showed that local and central government debt
equalled 58 percent of gross domestic product last year, and
most economists estimate that corporate debt is at least twice
For now though, explosive debt growth appears to be slowing.
At least 35 Chinese companies cancelled or postponed previously
planned bond sales totalling 59 billion yuan ($9.75 billion) in
the last two months, according to Reuters calculations based on
That's good news for an economy where debt from all sectors
probably reached 218 percent of GDP at the end of 2013,
according to rating agency Fitch, up 87 percentage points since
2009. Economists warn that similarly rapid run-ups have led to
financial crises in other countries.
Higher interest rates are the main reason for the recent
wave of bond issue postponements, with borrowing costs rising as
China's central bank set about damming the flood of easy money
and over-investment that had supported economic growth in the
face of the global financial meltdown.
The benchmark yield on five-year AAA-rated medium-term notes
reached a record-high 6.36 percent on Dec. 31, up
from 4.51 percent in mid-May, according to data from the
National Interbank Funding Centre.
China's second-largest coal producer, China Coal Energy Co.
Ltd. , planned to sell one billion yuan of
10-year medium-term notes on Dec. 24 but cancelled the sale at
the last minute, saying the funds weren't necessary to fund
"We already issued some medium-term notes a while back, so
we have enough money for the moment," said a woman at the board
secretary's office of China Coal, who declined to give her name.
"We were originally approved to issue (a certain amount),
and we thought it would be a pity not to use up the full amount.
But if we don't issue right now, it won't have much of an impact
on the company," she said.
This and similar statements by Dongfeng Motor
and Inner Mongolia Junzheng Energy and Chemical
Industry suggest the postponements may carry little
cost to China's economy.
Indeed, China Coal said it had plans to finance six coal
gasification projects, but the government has identified coal
gasification as suffering from severe overcapacity.
Dongfeng said it had planned to use proceeds from its bond
sale to "replenish liquid funding," a vague term that can
include almost any activity.
While Dongfeng's specific plans aren't known, economists
expressed concern earlier this year that state-owned borrowers
with easy access to credit - but few avenues for productive
investment - were engaged in arbitrage by re-lending borrowed
funds at higher rates to firms that struggle to obtain bank
loans or issue bonds.
High borrowing costs have already contributed to a slowdown
in overall borrowing. New credit of all forms grew 32 percent
year-on-year in the first half of 2013, but by November the
growth rate had slowed to 14 percent.
In response to rising borrowing costs onshore, Chinese firms
have also increased their borrowing dollars offshore, where the
Federal Reserve's bond-buying stimulus programme has kept rates
And in late December, Shanghai Chengtou, a financing
platform owned by the municipal government, sold $200 million
worth of U.S. dollar notes, the first sale of foreign-exchange
denominated bonds in China in over three years and only the
third ever. The cost, set at a floating rate linked to Libor,
was lower than the company could have obtained by selling yuan
The key factor driving onshore rates higher is China's plan
to loosen the government's grip on interest rates. An official
cap on bank deposit rates has long kept borrowing costs across
the economy artificially low, effectively subsidising investment
in factories, roads, and apartment blocks.
But in a landmark reform blueprint released following a
Communist Party meeting in November, top leaders pledged to let
the market play a decisive role in allocating resources,
"As interest rates rise, we should see credit demand
decline, and cancelled issuance is one way that shows up," said
Yao Wei, China economist at Societe Generale in Hong Kong.
In fact, de facto liberalisation has been underway for
several years, as Chinese savers have increasingly shifted from
traditional bank deposits to higher-yielding substitutes known
as wealth management products, which are not subject to the cap
on deposit rates.
In addition, China's central bank has recently signalled an
unofficial shift to tighter money. The People's Bank of China
last month allowed the interest rates that banks charge each
other for short-term loans to spike to unsustainable levels, the
second such cash crunch in six months.
The PBOC's refusal to inject large amounts of cash into the
banking system, even as banks scrambled for funds and default
rumours circulated, sent a blunt message that banks should focus
While state-owned companies are the main issuers of
corporate bonds, Yao said private-sector firms may be feeling
the credit squeeze even more acutely. That could be bad news for
China's economy, as economists say private firms use capital
more efficiently on average than state-owned companies.
"What's not showing up in the bond data or even bank lending
data is a sharper decline in the credit demand of the private
sector," she said.
Yao warned that higher interest rates are likely to weigh on
growth in 2014.
($1 = 6.0506 Chinese yuan)
(Additional reporting by Shanghai newsroom; Editing by Eric