Heavily Indebted Chinese Companies Pose Beijing a Challenge | Voice of America
WASHINGTON – In the latest sign that corporate debt levels in China pose a threat to the wider economy, Chinese regulators were forced on Friday to halt trading in bonds issued by Evergrande, the country’s second-largest real estate developer. country. Fears that the company might not be able to continue making payments on its bonds caused a massive sell-off from investors, damaging the exchange.
The rush to offload the bonds issued by the company – some selling for as little as 26% of their face value – came after a Bloomberg report that two large trust companies that made large loans to Evergrande demanded a immediate refund.
The Evergrande crisis comes just days after another large Chinese firm, China Huarong Asset Management, released a long-delayed earnings report showing it lost $ 15.9 billion last year and that its debt ratio at one point totaled a whopping 1.333%.
State financial corporations devised a bailout for Huarong late last month to avert a collapse that could have been catastrophic for the economy. However, there is no indication of a similar soft landing for Evergrande, which sold assets in a rush to raise the cash needed to satisfy lenders.
Huarong told investors last Sunday that he believes he will be able to continue paying his creditors and that in the “near future” he will start selling non-core business units to raise additional cash and replenish his capital. . The company had already sold more than half of its non-financial subsidiaries.
Evergrande, earlier this week, was forced to warn investors in a earnings release that the group “has risks of default on loans and cases of litigation outside the normal course of business,” adding : “Shareholders and potential investors are urged to exercise caution when trading in group securities.
Nonetheless, a company statement said: “The group will do everything possible to continue operations and will endeavor to deliver the properties to customers as planned.”
Payment defaults are increasing
The problem of unsustainable debt is not confined to large companies like Evergrande and Huarong. In 2019 and 2020, Chinese companies defaulted on more than $ 20 billion in debt, and analysts believe 2021 is on track to set a new record.
“Debt, whether public or private, appears to be an Achilles heel for China, and accounting practices and reporting are murky,” said Doug Barry, spokesperson for the US-China Business Council.
“State-owned enterprises are huge, and some of them are extremely inefficient. It’s an issue that has caught the attention of government regulators, an important first step in addressing it, ”Barry said. “The private sector is important for China’s future growth and care must be taken not to suppress it too harshly. “
In a sense, the wave of defaults can be seen as good news, as it signals that the Chinese government has recognized past practices as unsustainable. For years, large losing Chinese companies have been kept afloat by waves of new loans, often issued with the blessing of the government.
In recent years, Chinese regulators have attempted to crack down on these so-called “zombie” companies, which hijack the assets of profitable businesses, thereby dragging the economy down.
Beijing’s growing willingness to let businesses default and shut down, while painful in the short term, could lay the groundwork for a stronger economy in the future. However, the low transparency requirements for onshore debt issuance make the true depth of the debt problem difficult to discern.
“China has a serious zombie problem”
“The Chinese economy has long suffered from excessive debt from non-financial companies,” said Tianlei Huang, a researcher at the Peterson Institute for International Economics. “As a result, China has a serious zombie problem. Across the country, there are probably tens of thousands of zombie businesses that suffer persistent losses but are only kept alive by continued bank credit and government grants. “
According to the Bank for International Settlements, at the end of 2020, the total debt issued to non-financial corporations in China was equivalent to 161% of the country’s GDP. This was significantly higher than the average for the G-20 countries (102%) and even the average for emerging market economies (119%).
“The excessive indebtedness of non-financial companies can pose a threat to the stability of the financial system as a whole,” said Huang, who corresponded with VOA by email.
Bankers get nervous
Over the years, Chinese banks, sometimes with the encouragement of government officials, have granted hundreds of billions of dollars in loans to Chinese companies. As defaults increase, the ability of banks to absorb loan losses deteriorates.
There are signs that bankers are getting nervous. In July, China Guangfa Bank decided to freeze part of Evergrande’s assets for fear the company would not be able to meet a loan that was due to fall due next March.
The Evergrande struggle is of particular concern to banks because of what it says about the property development sector in general. Loans to real estate companies represent a significant portion of Chinese banks’ loan portfolios, so if Evergrande is unable to service its debts, it will challenge the quality of other real estate assets on bank balance sheets.
Until recently, many lenders and investors implicitly believed that large ailing companies in China were considered “too big to fail” and would be bailed out by the government.
By allowing a number of these companies to default on their obligations in recent years, said Huang, “Beijing was trying to signal to all participants in the credit market that ‘too big to fail’ is no longer holding. it intends to allow more than – managed state-owned enterprises to default on their obligations.
Huarong’s bailout this summer shows that, at least in some cases, Beijing will still feel the need to intervene.
“The approach taken by Chinese regulators is to gradually expose the risks of bond default and at the same time avoid anything that could suddenly explode, threatening financial stability,” Huang said. “This means there will be fewer government bailouts going forward, but for companies considered to be systemically or strategically important, the bailouts are likely to continue.”