What Singapore Investors Need To Know About China’s Debt Situation

China is currently facing a major debt issue.

In a 2015 report, consulting firm McKinsey found that China’s total debt had quadrupled from US$7 trillion in 2007 to US$28 trillion by mid-2014. The study also found that half of the loans are either directly or indirectly linked to the real estate industry in China.

Debt defaults in China

More cracks in China’s debt situation have appeared in recent times. Late last month, Bloomberg reported that two Chinese state-owned enterprises (SOEs) had defaulted on their debt-related payments.

The two SOEs in question are steel products manufacturer Dongbei Special Steel Group and power-generation equipment maker Baoding Tianwei Group.

In the case of Dongbei Special Steel, the company had defaulted on a RM852 million corporate debt in late March this year, just days after its chairman had committed suicide. As for Baoding Tianwei, it made history in April 2015 when it became the first-ever Chinese SOE to default on its borrowings; the company is currently undergoing bankruptcy procedures.

The Singapore connection

As I had mentioned earlier, there is plenty of debt in China that’s linked to the country’s real estate market. If the Chinese real estate industry were to collapse on the inability of Chinese companies to finance their debt, then companies that depend on the industry may get hit pretty hard.

There is a Singapore-listed property company that has big chunks of its business located in China at the moment. The company in question is Perennial Real Estate Holdings Limited (SGX: 40S). As of the end of 2015, it had 72.6% of its total assets based in China.

Foolish Conclusion

China has some debt issues to manage. But that does not mean the country can’t grow out of its woes. In any case, it’s worth thinking about the potential impacts that China’s debt situation may have on companies that do significant business in the country.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat doesn't own shares in any companies mentioned.