China banks may need $1.7 trillion injection as credit quality worsens
Rising debt levels will worsen the credit profiles of China's top 200 companies this year, requiring the country's banks to raise as much as $1.7 trillion in capital to cover a likely surge in bad loans, S&P Global said in reports on Tuesday.
The study sees little scope for improvement in 2017 amid worsening leverage and excess capacity in almost all sectors.
Debt has emerged as one of China's biggest challenges, with the country's debt load rising to 250 percent of gross domestic product (GDP). Excessive credit growth is signalling an increasing risk of a banking crisis in the next three years, the Bank of International Settlements (BIS) warned recently.
Seventy percent of the companies in the S&P survey were state owned, and they accounted for $2.8 trillion or 90 percent of the total respondents' debt.
S&P estimated the problem credit ratio at Chinese banks was already at 5.6 percent at end-2015. In a downside scenario of unabated credit growth, that could worsen to 11-17 percent.
In such a situation, banks would need as much as $1.7 trillion in recapitalisation by 2020, S&P estimated. Even under a base case scenario, they would require $500 billion.
That compares with China's last big bank debt cleanup some two decades ago, when an estimated 4 trillion yuan ($600 billion) was spent on restructuring as of late 2005, according to a report for French economics thinktank CEPII.
S&P expects Beijing will continue to allow rapid credit growth over the next 12-18 months before attempting to rein it in, implying risks would heighten in one to two years.
The IMF has warned China its credit growth is unsustainable, with companies sitting on $18 trillion in debt, equivalent to about 169 percent of GDP.
Chinese banks' non-performing loans are already at nearly 2 percent, the highest since the global financial crisis in 2009, according to the China Banking Regulatory Commission (CBRC).
But some analysts believe the ratio could be as high as between 15 and 35 percent, as many banks are slow to recognise problem loans or park them off balance sheet, and as lenders come under political pressure from local governments to roll over bad loans to prevent job losses and defaults.
Google and Facebook partner on PLCN submarine cable between Los Angeles and Hong Kong
Google said today that it’s working with Facebook and China Soft Power Technology Holdings subsidiary Pacific Light Data Communication to construct a trans-Pacific undersea cable. The Pacific Light Cable Network (PLCN) will transmit 120 terabits of data per second between Los Angeles and Hong Kong — a span of almost 8,000 miles.
Facebook Inc. and Google owner Alphabet Inc. will partner with a little-known Chinese company to build a ultrafast internet cable between Los Angeles and Hong Kong, the latest sign of its U.S. backers' insatiable appetite for bandwidth.
The 12,800-kilometer Pacific Light Cable Network would use new fiber-optic technology to support the region's highest-capacity route, according to TE Connectivity Ltd., the U.S. company under contract to build the link. TE says it expects to launch the system in 2018.
Funding the project along with the U.S. tech giants is a new Hong Kong company called Pacific Light Data Communication Co.
"It is certainly gratifying that global technology companies like Google and Facebook have become co-investors" in the project, the Chinese company's chairman, Wei Junkang, said in a statement.
Financial terms weren't disclosed. Spokeswomen for Facebook and Google declined to comment on their Chinese partner in the project. Pacific Light Data didn't respond to requests for comment.
Pacific Light Data is a newcomer to the industry with no previous experience building networks. Mr. Wei earlier this year paid $11.3 million to acquire the company's interest in the project from China Soft Power Technology Holdings Ltd., whose chairman is Mr. Wei's son, according to company filings.
China Soft Power, a holding company that is listed in Hong Kong but incorporated in Bermuda, told investors on Oct. 7 that it expected to "record a significant decrease in its net loss" for the six months ended Sept. 30. The company reported a loss of 1.2 billion Hong Kong dollars ($161 million) on negligible revenue for the fiscal year ended March 31.
Google, Facebook and Microsoft have invested hundreds of millions of dollars in the underwater cables that carry most of the world's internet traffic, an effort by the technology companies to ensure they have enough network capacity to cheaply shuttle information between their data centers. The investments have pushed aside the telephone companies that have dominated the capital-intensive market for more than a century.
Google is no stranger to the Pacific market. Pacific Light would be its third publicly disclosed investment in a data route across the ocean. Facebook earlier this year revealed plans to build a new trans-Atlantic cable with Microsoft and Spanish telecom provider Telefonica SA.
Facebook and Google have struggled to make and maintain inroads into mainland China, where both companies' flagship websites are usually blocked by the country's national firewall. Hong Kong is a major regional network hub outside that firewall, however.
"If you can get a good reliable cable into Hong Kong, it really puts the content providers in a really good position to serve those lucrative Southeast Asian markets," said Michael Ruddy, director of international research for industry consultancy Terabit Consulting.
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