In 2016, China allowed the first companies to officially go bankrupt in order to restructure its debt load. But this was only the beginning of a series of defaults.
Last year the country reported a record number of bond defaults totaling 119.6 billion yuan. 2018 will remember the shortage of liquidity, including in China, as the authorities pursued a policy aimed at reducing lending to the economy, to put it simply, blew the credit bubble. And according to Bloomberg,
2019 promises to be no better.
Two major borrower missed deadlines for payment on its obligations. This creates conditions for a greater number of corporate defaults and “underlines the risks that are accumulating in the credit market”, says the Agency.
The first was China Minsheng Investment Group, a private investment group with interests in renewable energy and real estate, which are unable to pay the obligations on the bonds on 1 February. The Shanghai financial conglomerate defaulted on 3 billion yuan, the maturity of the obligations occurred on January 29, after which the borrower promised to return money lenders with a delay of three days, but this did not happen.
This is one of the largest companies engaged in private investment in China. According Shanghai Brilliance Credit Rating & Investor Service Co., on June 30, China Minsheng Investment had total debt of 232 billion yuan and total assets of 310 billion yuan.
The second name has gained notoriety last year when the company defaulted. We are talking about Wintime Energy. Last week she was unable to fulfill the obligations under the plan of debt restructuring.
Remarkably, in both cases, the companies are large borrowers. Problems with access to Finance suggest that “the government’s efforts to curb credit growth to benefit not all companies”.
In fact, when China Minsheng eventually will default and become bankrupt, along with Wintime Energy it will be considered as one of the biggest failures in China with a debt of about 230 billion yuan.
The growth of Chinese companies in recent years, often financed by short borrowing, however, the investment cycles of most of them long-term, and this is one of the reasons for recent financial problems.
In fact, the size of Chinese economy these defaults are not so big, but the problem is that defaults are triggered by certain processes. The authorities began to tighten the screws in the first place this applies to the shadow financial sector of the economy, therefore many companies have problems with refinancing of loans.
Against this background, looks intimidating schedule of repayment of bonds: corporate bonds trillion yuan must be repaid in the following quarter, virtually ensures that new defaults.
Dynamics of spreads in the debt market only reinforces fears.
The yield on five-year bonds with a rating of “AA”, which in China is considered to be “junk”, still more than 300 basis points higher than the same paper with a rating of “AAA”, which is more than two times higher than last year.