According to Fitch Ratings, state-owned companies defaulted on bonds worth a record 400 billion yuan (1 1.1 billion) between January and October. That’s almost as much as the last two years combined.
That is worrying on some fronts. First of all, the close relationship between these companies and the local Chinese governments usually makes them safe bets in times of trouble. If investors worry that the state is no longer willing to support them, they suddenly become a more risky proposition.
Second, the success of the state sector is crucial to China’s financial system. While such companies contribute less than a third of GDP, they have more than half the bank loans offered in China and about 0% of the country’s corporate bonds, according to data from People’s Bank of China and Chinese brokerage Huachuang Securities.
“The most important action is against the reliability of government guarantees [financial] Crisis so far. “We are now seeing signs that this credibility is declining,” said Logan Wright, Rhodium Group’s director of research in China markets.
Historically, Beijing has been reluctant to allow these companies to fail. The Chinese Communist Party has tight control over the vast swords of the economy, including trade, and believes that the relationship between these companies and the government is important for maintaining it.
Now, they seem ready to let at least some crash. But too many defaults on loans and corporate bonds will weaken the financial system, making that approach riskier.
Wright wrote in a recent research note that “the authorities want market discipline for risky payers, they don’t know how far they can make a broad transition into credit risk.” Wright wrote in a recent research note. “Given that there are no examples of this risk in China’s financial system, no one can clearly understand this sentence.”
If Beijing’s ability to manage Beijing is questioned, Wright warned that the result could strain the financial markets, reducing available credit and liquidity. There have already been some results: Bond financing fell sharply in November, according to figures released by the People’s Bank of China on Wednesday.
Julian Evans-Pritchard, a senior economist at Capital Economics, wrote in a research note on Wednesday that efforts to rule out risky borrowing would result in the speed of non-bank lending.
“While it will not derail China’s economic recovery overnight, it will gradually weaken the recent tailwinds with policy stimulus,” he said. On purpose Move by the Chinese government Billions of dollars in free spending this year to cut interest rates and boost growth.
‘Inevitable’ default
While the prospect of a record amount of bond defaults this year is very much in line with the coronavirus epidemic, China’s state-owned businesses have been accumulating debt for years.
But those investments did not produce good returns as expected.
The shortcomings of state-owned enterprises have been widely acknowledged. Such companies are much less competitive than their private counterparts and produce lower returns on investment, Ning Gaoning, chairman of the state-owned chemical group Sinochem Group, said at a large political gathering in Beijing in May.
Surprisingly, state-owned companies are responsible for the lion’s share in issuing credit bonds in the first nine months of the year. According to Chinese rating agency Penguin International, such companies have raised about 8.5 trillion yuan (1. 1.3 trillion), compared to 857 billion yuan (13 131.2 billion) for a private company.
Diff, lt, meanwhile, has increased dramatically. Nomura analysts estimate that companies have closed bonds worth about 178 billion yuan (27 27 billion) in China’s main market by mid-November. About 43% of them come from state-owned companies, more than 30% from the recent annual average.
“We’re likely to see a lot of such defaults in the coming years,” Nomora analysts wrote.
Striking balance
Beijing is taking some steps to help calm the market. Last month, People’s Bank of China injected a trillion yuan (15 153 billion) loan into markets to ease liquidity tensions and calm investor nerves.
Vice Premier Liu He, chairman of China’s Financial Stability Committee, is also trying to boost confidence. During a recent meeting with financial and economic officials, he urged local governments in China to use warning systems to detect systemic hazards and prevent bad situations by using them to maintain adequate liquidity.
Still, Liu and others have made it clear that not everyone should be saved. At the same meeting, he warned state-owned companies that Beijing has “zero tolerance” for “strategic defaults” – a remark that means the government thinks some companies are knowingly avoiding debt obligations that they should be able to meet. Should. .
“Although the central government is trying to reduce the implicit guarantees in the market, their goal is to do so” systematically, “these analysts wrote in a recent research note.
“The post-China Covid economic recovery is still ongoing, the main thing is that the government will try to address these risks,” he added.
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