Tsinghua Unigroup, a leading semiconductor company that the Chinese government has been fostering, defaulted on its debt this week, analysts said, this default may only be the tip of the iceberg of China’s overall debt crisis, and the progress of China’s “semiconductor localization” fear that the resulting alarm.
Purple light on Monday (Nov. 16) was reported to be unable to repay a tranche of private debt worth 1.3 billion yuan (about $200 million), immediately after the credit rating was downgraded precipitously, and due to the fear of cross-default, the trading price of its bonds fell sharply for two consecutive days, resulting in the other outstanding bonds, with a total size of about 2.45 billion U.S. dollars of four tranches on the Hong Kong Stock Exchange on Wednesday (Nov. 18). Trading was suspended.
In response to the debt crisis of this large state-owned enterprise, market investors have been expecting the Chinese government to rescue.
In this regard, some analysts believe that the Chinese government will not go all out, but will provide financing to enable us to propose a repayment plan that satisfies creditors. However, based on the official support for the semiconductor industry, they say that the final move to nationalize the entire company is not unlikely.
Ten State-Owned Enterprises in a series of lightning
Since February of this year, the Founder Group of the North burst out of a RMB 2 billion debt default, Anhui Foreign Economic Construction, Huaxun Ark, Brilliance Auto, Henan Yong Coal Holdings and other nine state-owned enterprises in a series of thunderstorms. According to the Taipei-based China Institute of Economic Research (CIER), the total amount of defaulted loans is nearly RMB 16 billion. However, this does not take into account other debts that are still under confirmation, such as the total amount of claims declared by the Founder Group, which has entered bankruptcy reorganization proceedings, as of the end of October was more than RMB 230 billion, according to surging news reports.
This is the tenth such case. In addition to the RMB 1.3 billion of debt that has matured, as of the end of June, the company still had as much as RMB 156.7 billion ($23.8 billion) of interest-bearing debt to repay, according to its first-half earnings report. Among them, 52%, nearly 82 billion yuan of the bonds will be due in the first half of next year.
As a leading semiconductor company, if Purple is unable to repay the debt, it is likely to follow in the footsteps of the Founder Group, forced to declare bankruptcy, which makes many media to “China’s science and technology myth has been pierced again”, or “China’s semiconductor dream shattered” to describe it.
In this regard, Taiwan’s Chinese Academy of Economic Sciences Associate Researcher Wu Mingze in an interview with the Voice of America pointed out that the Chinese government recently on the state-owned enterprise debt “bottoming out” style has changed, requiring investors to have their own risk of profit and loss to bear, in order to avoid pushing investors to the “moral hazard” of impunity.
However, the semiconductor industry is China’s focus on fostering violet, therefore, he believes that the possibility of the official let its default bankruptcy is not high.
Wu Mingze: Purple fear that the entire was nationalized
In the past, whenever there was a bond crisis, they (investors) thought that the government would underwrite it, and the problem of moral hazard would become more and more serious,” Wu said. But now, mainland China just wants to say that investors should take the risk. However, because Ziguang Group is so big, and is a state-owned enterprise, I think, (the official) will not really step in to save it, but may do some (financing) arrangements, so that Ziguang Group can propose some repayment plan, so that investors or banks to accept, but if it really can not accept, it may be the government to the entire nationalization.”
Xie Tian, a professor at the University of South Carolina’s Aiken School of Business, also believes that the authorities should have injected funds to save the company, but he described the bailout in terms of “feeding the poison. He said, because of poor management of Chinese state-owned enterprises already poor profitability, in the economic downturn, it is even more difficult to play sales force, at this time, the official to give more money also just the more help the worse.
An anonymous economist in Beijing said that the government should be forced to “kidnap” ZiGuang with this financial predicament, and the government should be forced to fight for ZiGuang’s room to be reorganized from a tax and capital perspective. However, he also questioned, the Chinese government even some local civil servants’ salaries are in arrears, in the end, how much left to save the company.
He criticized that, like Fangzheng, ZiGuang is China’s doomed science and technology myth, and, such as ZiGuang state-owned enterprises are a tool for the rich and powerful class or the so-called private shareholders to enrich themselves, hollowing out the enterprise and debt to stay in the country.
He said: “Some (private) shareholders are the equivalent of maggots on Tsinghua’s body, have gnawed up all the Tsinghua, and have grown fat themselves, leaving all the debt to Tsinghua.”
Purple’s latest shareholding shows that Tsinghua Holding Company, a state-owned asset management company under Tsinghua University, still holds 51% of Purple’s shares, while the remaining 49% is held by the Jiankun Group, represented by current chairman Zhao Weiguo, since 2009.
Although the company still has assets worth RMB 300 billion on its books, which is much higher than its total liabilities of RMB 202 billion, the economist said that in the future, the company will be able to continue to invest in the company. However, the economist said, if the company enters bankruptcy reorganization in the future, all of its assets will be liquidated at a discount, and it is feared that the company will face the dilemma of “insolvency.
China’s Corporate Debt Risks Are High
In addition, all three analysts say that Ziguang is just the tip of the iceberg of China’s overall debt crisis.
Chinese companies’ debt issuance has risen rapidly since the Asian financial crisis in 2008, said Wu Mingze of the CEA. Although the Beijing government took a series of deleveraging measures in 2017 to slow the annual increase, it was also due to the deleveraging policy. However, the deleveraging policy has also made it difficult for Chinese companies to borrow money and put them under greater operational pressure.
With the trade war between the U.S. and China in 2018 and the negative impact of this year’s neo-crowning epidemic, Wu said Chinese companies have had to resort to debt issuance again in the past two years to maintain operations.
Citing statistics from the Chinese Academy of Social Sciences, he noted that as of the end of September, Chinese corporate debt accounted for 164% of total domestic production (GDP), or about RMB 162 trillion in size, while during the same period, China’s overall debt was about 270% of GDP, or about $267 trillion, equivalent to nearly RMB 200,000 in debt per Chinese person.
With the Beijing government’s new infrastructure plan costing nearly 10 trillion yuan, Wu said China’s debt levels are likely to rise rather than fall in the future.
The risk of Chinese corporate debt has always been high, Wu said, coupled with the fact that companies are often in poor physical condition and ratings are difficult to accurately reflect, which is a long-term malady, especially since the defaults of large companies such as Unisplendour are considered a serious warning sign. However, because Beijing has more administrative tools to control the market, Wu said, China’s corporate debt should not get out of control in the next two to three years. For example, he said, Beijing first cracked down on housing last year with a “no-lift order” and then, fearing the bursting of the housing bubble, issued a “no-drop order” to keep prices stable and avoid bankruptcies or large-scale debt defaults by real estate companies.
In addition to corporate debt, local government debt is another big risk for China’s financial market.
The local debt crisis should not be underestimated.
The central government has been cleaning up local debt for years, but local government finances are “rotten to the core” and debt transparency has long been criticized, which makes it difficult to clean up if hidden debts are added.
According to CCRI’s assessment, China’s local governments may have as much as RMB 43 trillion in hidden debts by 2019, which, when combined with officially announced debts, would total RMB 67 trillion.
Professor Xie Tian of the University of South Carolina is also pessimistic, saying that the successive debt defaults of Chinese state-owned enterprises, including Ziguang, since the beginning of this year are already a systemic financial risk, and if local government debt is added to this, the risk of China’s overall debt crisis is high and cannot be underestimated.
He said: “Some local governments continue to expand, (still) increase redundancy (in); local governments through a lot of financing platforms, building iron (roads), public (roads), infrastructure (infrastructure), the accumulation of a large amount of debt, this is also a big crisis.”
In addition, the financial crisis also reflects the great difficulties encountered by China in the progress of “semiconductor localization” and “de-Americanization”.
Semiconductor localization process blocked
With the resources of the state fund, since 2012, Purple is not based on research and development, but relies on M&A investment and debt financing to grow, the total assets almost five times. Although the company now has a total of six listed companies, including two Hong Kong and four Shanghai A-share companies, SMIC is subject to the U.S. government’s “chip technology export control,” the future operating prospects are difficult to be optimistic.
For the other subsidiaries, even the low- and mid-tier wafer chains may take up to 10 years to build. Weiguo Zhao, chairman of the board of directors of Purlux, recently described himself as “China’s semiconductor industry is partially overheated, but concentrated in low-level competition; and China’s semiconductor industry still has a very long way to go, sitting on the bench for another ten years. ”
In an interview with the Voice of America, researcher Liu Pei-zhen of the Taiwan Institute of Economic Research (TIE) said that the official government is focusing on supporting semiconductor manufacturers, including Unisplendor and Wuhan Hongxin, which went bankrupt a while ago, and is carrying the major mission of making China’s semiconductors independent and localized.
However, she said, under the U.S.-China technology tug-of-war, China’s semiconductor industry is facing a so-called “choke point” dilemma, including first, the lack of excellent semiconductor talent. Secondly, the self-sufficiency rate of semiconductor equipment is not high, as much as 46% of the semiconductor equipment a year to rely on imports to obtain, especially the front-end of the wafer equipment by the United States blocked, a serious barrier. Most importantly, the key core chips and technologies are still in the hands of the United States. In other words, China’s semiconductor technology was already seriously behind the U.S., and now the U.S. is blocked, even if the market is huge, can not push the localization of the semiconductor.
Liu Peizhen said: “The United States actually has these leverage, so China actually in this year the entire process of semiconductor localization, you can see that these cases, in terms of feeling, it is a localization process are hampered.”
Liu Peizhen said, China can now indeed not rely on the United States, open the capacity of low- and medium-order semiconductor products. But high-order electronic products is the future trend and in line with consumer demand, if China can not ship, it will lose market share of the high-order market. For example, Huawei, which originally developed the high-end cell phone territory, if the lack of chips and can not be made in the future, it will gradually be transferred to foreign brands such as Samsung and Apple.
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