Warnings mount on world's corporate debt, China crisis

“As the credit cycle ages, following years of record-setting bond issuance, there are growing concerns about signs of stress in corporate balance sheets,” said the Institute of International Finance in Washington. 

The body flagged a double threat: a five-fold rise in company debt to $25 trillion in emerging markets over the past decade; and record junk bond issuance in US and Europe, along with shockingly-irresponsible levels of US borrowing to buy back shares and pay dividends.

“For the most part, this very significant amount of debt has been used to pay dividends, buy back shares and fund M&A transactions, rather than financing capital spending, which has been on a declining trend since 2012 (and fell 3.5pc in the first quarter on 2016)," it said. 

Companies on both sides of the Atlantic have issued $1.9 trillion of junk bonds over this cycle, with volumes running at double the pre-Lehman pace. 

The weakest CCC-rated debt has grown in share and is already under stress, with yields spiking to 20pc in February. “The number of corporate defaults has reached the highest level since the financial crisis. It is not restricted to the energy sector,” said the report.

 The IIF thinks a full-blown global crisis can be averted. Others are not so sure. The US billionaire investor Stanley Druckenmiller warned this week that China has stoked an “extremely rare and quite dangerous” debt boom all too like the US subprime mania in character, but greater in scale. 

The IIF estimates that China’s total debt has reached 295pc of GDP, and is still rising fast. This is unprecedented for a developing economy that lacks deep capital markets or layers of accumulated wealth, and that now has a shrinking workforce as well.

DYI