Shock waves in markets as Chinese firms default on record debts

New Delhi, Dec 14: The Chinese state owned companies have defaulted on their debts and the state firms have defaulted on a record 6.1 billion USD worth of bonds between January and October according to Fitch Ratings.

This development has sent shock waves in the debt market. The non-payment of debt payments is only getting worse and a slew of major companies such as BMW's Chinese partner, Brilliance Auto Group, Tsinghua Unigroup, and Yongcheng Coal and Electricity declared bankruptcy or defaulted on their loans in November.

The investments have become a riskier proposition as the state is no longer willing to support these companies. The investors had believed that the close relationship between these companies and the Chinese governments had made them safe bets in times of problems.

CNN said in a report that the credibility of the government guarantees has been the most important bulwark against financial crisis so far. Now we are seeing signs that this credibility is eroding, the report said while quoting Logan Wright, director of China markets research at Rhodium Group.

A Reuters report said that the Huachen Automative Group Holdings Co, which is the parent of German automaker, BMW's Chinese joint venture partner, defaulted late last month, underdeveloped pricing mechanisms and investor naivety in China's corporate bond market.

If the company had told investors it was in great trouble, I would not have boring and held the bonds, Shanghai based hedge fund manager Vincent Jin said. Huachen boasted an AAA rating when it launched its 1 billion Yuan three year, privately placed bond in October 2017. The investors were in shock when Huachen not only defaulted but was also dragged to court by a creditor for bankruptcy restructuring. One month before its bond delinquency, Huachen transferred its prized 30 per cent stake in Hong Kong listed, Brilliance China Automative Holdings Ltd to a subsidiary. This left bondholders with no access to those assets.

Analysts at Goldman Sachs recently pointed out that widespread failures in the sector could spill over into the banking system. This could cause banks to cut back on lending more broadly or increase rates and the latter is already beginning to happen. The analysts also point out that rescuing some state-owned firms from collapse is probably a dead end considering how financially hard the sector can be.

The Chinese companies have been piling on the debt for nearly a decade ever since the government responded to the 2008 crisis when it went on a borrowing binge. While it kept the Chinese economy moving at a cost, the corporate debt to the GDP ratio surged to a record 160 per cent at the end of 2017 from 101 per cent 10 years earlier.