The fault lines in China's economy have been exposed

Discussion in 'Economics' started by themickey, Nov 19, 2020.

  1. themickey


    Stephen Bartholomeusz Senior business columnist

    There has been a spate of Chinese companies defaulting on their bond repayments in the past few weeks, sending anxious ripples through the market that have even touched China’s sovereign bond yields and caused its central bank to pump liquidity into its bond market to try to calm it.

    While there’s something of a focus of concern on the coal mining sector, which was hit hard by the impact of the coronavirus on demand, it isn’t confined to that sector.

    There are big question marks over the willingness and capacity of local governments, and the central government, to bail out troubled enterprises.CREDIT:BLOOMBERG

    On Monday chip maker Tsinghua Group (also known as Unigroup) – a state-backed entity controlled by Tsinghua University and regarded as one of the stars of Beijing’s push to reduce its reliance on imported semiconductors – defaulted on a 1.3 billion yuan ($270 million) bond redemption that was due that day.

    Last week state-owned Yongcheng Coal & Electricity Holding Group was unable to repay a 1 billion yuan bond, which sent shudders through the entire sector, tanking bond prices, and triggered an investigation by the bond market regulator into its disclosures. Other coal companies cancelled planned bond issues or shrunk the size of their offerings.

    Last month Brilliance Auto Group, which has ties to BMW, was unable to redeem a 1 billion yuan bond and one of China’s biggest, and most indebted, property companies, China Evergrande, was forced to sell a major asset to raise 14.9 billion yuan to avert a liquidity crunch.

    Those defaults and stresses have raised questions about the state of China’s corporate sector and a question mark over the willingness and capacity of local governments, and the central government, to bail out troubled enterprises.

    Chinese banks and investors are reducing their bond holdings for fear that there will be more defaults as non-performing loans hit record levels. Bond yields are spiking to reflect the increases in perceived risk.

    Even China’s sovereign bonds have been impacted, with 10-year government bond yields reaching their highest levels in nearly 18 months.

    The failure of Yongcheng and the inability or unwillingness of its provincial government to bail it out before it defaulted has raised a broader concern about a credit crisis.

    There is a significant level of moral hazard in the relationship between state-owned companies and their local governments.

    The companies and their investors expect the governments to step in to avert losses of jobs and economic activity and therefore run higher levels of leverage than might otherwise be the case. The defaults question that assumption and their capacity to sustain excessive leverage.

    beginner66, TreeFrogTrader and Nobert like this.
  2. The central bank might be able to resolve a lot of these issues by using Qualitative Easing, which would buy up the risky assets the corporations have in exchange for cash. The central bank would hold the risky assets until the price rose again and then sell them. The fact that the government seems to be willing to let the bonds default may however be a tactic to offer a soft default.

    The company was listed as AAA- which means there should be some payout on the corporate bonds if the company enters administration and becomes insolvent. There could be another play or intended outcome, if the company enters administration it might be restructured which will enable it to continue its operations with alternative backing. It might be the government's plan to let someone else bail the companies out.
  3. bone

    bone ET Sponsor

    When your largest Companies are State-Owned Enterprises, and there are literally thousands of SOE's in China in every market sector - you can't bail them all out.
    beginner66 likes this.
  4. bone

    bone ET Sponsor

    The Wall Street Journal: When AAA Means Something Different in Chinese.

    There is now open talk in the credit markets about whether Chinese bond issuers ever meant to repay their bond loans - and that the SOE backing is in fact a worthless canard. There's now a deepening suspicion that Chinese state owned enterprises will just move good assets out before creditors drag them to court
    beginner66 likes this.
  5. themickey


    It could also be a plan that China knowing it has extensive cheap labour and many competitive advantages (never mind whether honest or not) believed it could never fail.
    Pre Wuhan Flu days, it's growth being such astronomical, any failures would be paid from another pocket or allowed to fail, in the grand scheme - an insect bite wouldn't affect it.
    Since then with Trump arrival on scene plus Corona Virus and global backlash against the CCP, it may begin to unravel.
    China continues under Xi Jinping with arrogance thinking it has the upper hand in global affairs.
    Should Biden continue to apply the thumb screws where Trump left off and so long as Australia plus Europe refuse to kowtow, it may see the beginning of a great turnaround.
    What is really required is a change of Chinese leadership (but I can't see that happening anytime soon), I have no problem with Chinese.
    The West doesn't wish to see China fail other than the CCP imo.
  6. JSOP


    That is a very disturbing assumption to begin with. You are not supposed to overextend yourself just because you think someone else is there to bail out when you f*** up. The government's help is supposed to be the last resort not an invitation to overleverage. The provincial and local government in this case is doing the right thing in not bailing them out. It would teach these corporations a lesson to be prudent. And if some of these corporations were state-backed projected then it should be the central government that should be bailing them out and not putting that burden on the local government. You can't start a project and then expect someone else to pick up the tab.

    This is not just an issue of financial imprudence but also a complete lack of coordination and disconnection between the central and local/provincial government.
  7. Many of these companies are backed by local and/or regional governments, not necessarily by the central government. That explains why the central government is looking at the involved regions to bail them out.
  8. JSOP


    Not all. The TsingHua Group is not and neither is the failing Yongcheng Coal & Electricity Holding Group. And many of these corporations were overleveraging themselves because they think the government will come to their aid no matter what happens without doing the necessary and proper risk analysis and suitability of their various projects and that is assuming that no corruption was involved.
  9. Fain


    China isn't stupid. They can easily structure the bailouts like the USA with fannie mae and freddie mac and make Billions on the recovery. That bailout made the USA over 100 Billion in PROFIT.
  10. bone

    bone ET Sponsor

    Mostly different underlying. Chinese SOE debt is NOT necessarily tied to a hard fungible asset like real estate, plant, and equipment. You’re talking about thousands of SOE’s - completely different scenario than a portfolio of residential homes.

    If you’ve ever seen a manufacturing plant liquidation it’s cents on the dollar.

    Last edited: Nov 21, 2020
    #10     Nov 21, 2020
    beginner66 likes this.