It looks like China’s trade war with the United States is the least of its concerns. The world’s second-largest economy is witnessing a record level of defaults, and it’s only getting worse with the economy weakening.
According to data gathered by Bloomberg, Chinese businesses defaulted on $5.8 billion worth of domestic bonds in the first four months of 2019, which is more than triple the total of the same time as last year.
This may seem like peanuts in the $13 trillion bond market, but it is clear that 2019 will certainly post new all-time highs.
The other option is that the can is kicked down the road even further because the federal government is urging financial institutions to extend more credit to the private sector, especially small- and medium-sized enterprises (SMEs). For instance, the People’s Bank of China lowered its reserve-requirement ratio for lenders.
Evidently, the default surge started in 2017 after China started to wind down excesses in the credit markets in the previous year, which is right around the time the slowdown commenced.
The business news outlet listed one company: Shandong SNTON Group.
Shandong SNTON Group is the biggest of a handful of private companies that sank into bankruptcy in recent months in the eastern province of Shandong. One outstanding feature of the iron-wire maker has been the extent to which it engaged in cross-guarantees, where firms pledge to back other companies’ debt. That caused the contagion risk that Shandong authorities moved to address by propping up China Wanda.
SNTON has defaulted on 4.65 billion yuan of local bonds this year, after having once provided some 86 billion yuan worth of debt guarantees — the equivalent of 35 percent of its net assets as of June 2018, according to a company filing.
The other pending headache is the corporate debt tidal wave about to sink China.
There’s big trouble in little China.
Leave a Comment