Chinese state-owned firm defaults as markets brace for tsunami of corporate insolvencies

Things are not looking up for China.

For the first time in 20 years, a state-owned business has defaulted on its obligations, a hint that the slowing economy and soaring debt levels are placing a strain on all three levels of government.

According to The Wall Street Journal, Qinghai Provincial Investment Group, the biggest aluminum producer in the province of Qinghai, failed to make an $11 million interest payment on an offshore $300 million bond. The government-owned business also missed a principal and interest payment on a $3 million domestic bond.

While S&P Global Ratings revealed it would not count the bond in default, the ratings agency did provide a bearish forecast on the company’s future, citing risk and a belief that the government’s aid “will weaken over time.”

This comes as top Chinese banks sounded the alarm about a tsunami of companies potentially defaulting on their debts if they are issued in U.S. dollars. Due to borrowing costs and a tumbling yuan, many businesses could not meet payments, which could be exacerbated since more bonds are expected to mature in the next few years.

In the first 10 months of 2018, Chinese offshore corporate dollar bond (OCDB) defaults reached $3.4 billion, which was up from zero in the previous years. Experts are now waiting for a tidal wave of insolvencies in 2019 and 2020.

It looks like China will be in a perpetual state of winter for the next couple of years, and perhaps it is too late for a new U.S.-China trade deal to rescue the world’s second-largest economy.