In the global corporate debt market, the debt problems of Chinese companies are in the spotlight. The debt of companies in the civil engineering and construction sectors, which have been undertaking public utilities as part of the economic stimulus, has increased significantly. It is believed that the government, which is striving to make its debt sound, will no longer support state-owned enterprises as it did before, and foreign currency-denominated bonds are under selling pressure, with bond spreads rising. A “hard landing” with an increase in debt defaults could shake up global markets.
Of the corporate debt issued by Chinese companies, $2.14 trillion will mature in the three years to 2023. This is 1.6 times the size of the 2018-2020 period. Increased debt service burden.
China’s state-owned distressed debt processor, China Huarong Asset Management, is busy dealing with liquidity issues that are critical to the survival of the business. The company’s companies have reached an agreement with banks to extend the repayment of a $100 million loan until the end of August. It will also accelerate the sale of its holdings in Nanjing Panda Electronics and others. Huarong has a group-wide balance of nearly 330 billion yuan of corporate bonds in issue, but nearly 60 percent will mature by 2023.
Payoffs are not limited to Huarong. According to data from financial information firm Refinitiv, repayments will be highest in 2021 at $748 billion, $669 billion in 2022 and $727 billion in 2023. There are many cases of Chinese companies issuing corporate bonds with a maturity of one to three years and relatively short term. As corporate bonds continue to be issued, the final repayment amount is expected to increase further.
China National Railways Group needs to pay off nearly $90 billion in debt by the end of 2023
It is the large state-owned enterprises that are burdened with large amounts of debt. China National Railways, which is directly owned by the government, has nearly $90 billion to repay by the end of 2023, while State Grid, which is responsible for transmission and distribution, has about $14 billion to repay. Both companies are unlisted, and low cost awareness has contributed to the increased debt. Civil engineering and construction, which have been responsible for public utilities, plus national railways and the national grid, will have to pay off $600 billion, or 30% of the total.
To avoid the negative impact of excess SOE debt on the government’s credit, there is an intention by the Chinese leadership to reduce “tacit government guarantees”. Debt defaults on RMB-denominated debt were $95 billion from January to April, hovering at a record high level. Against the backdrop of increasing corporate debt repayments, it will be difficult to avoid further increases in defaults if government-led support is reduced.
Jia Shen, an associate researcher at the Development Research Center of the State Council of China, noted that Chinese companies are acquiring more and more assets amid inefficient investments. The increase in RMB bond repayments is a symbol of China’s increasing debt. In a sense, it is bank financing in disguise, mainly invested by domestic investors.
What matters to overseas investors is the movement of less than 10% of foreign currency bonds, with repayments set to reach $172 billion in 2023. And, worryingly, defaults on foreign currency bonds are on the rise.
Data from Refinitiv and others suggest that at least 10 more Chinese dollar bonds will default after 2020. Beifang Founder Group, a large IT company founded by Beijing University, went into “reorganization” in February 2020, with a number of US dollar bonds unable to pay principal and interest.
Beifang Zheng has given a “Keepwell Deed” to some of the dollar bonds issued by its companies. The agreement is generally for the parent company to ensure that the subsidiary’s finances remain in good standing. But Beifang has excluded these bonds from repayment on the grounds that the agreement does not guarantee repayment, and some overseas investors have reportedly started judicial proceedings.
State-owned semiconductor company Ziguang Group has also repeatedly defaulted on its U.S. dollar-denominated bonds, and in February the Hong Kong-based legal entity of Citigroup demanded that Ziguang pay interest and repay the principal on the bonds and filed a lawsuit. The view began to emerge that “Chinese companies have decided not to repay their debts and have to invest in government bonds and policy bank bonds without fear” (foreign banks).
The dispersion of investors is also evident in the data. According to FTSE Russell (UK), the spread between investment-grade corporate bonds of Chinese companies and others and U.S. Treasuries rose 0.4% in April. This is in stark contrast to the narrowing spreads in Korea, Hong Kong, Indonesia, etc. amid the global liquidity glut.
If the Chinese government suddenly shrinks the “tacit government guarantee”, it may cause a shock to the bond market. Kenneth Ho of Goldman Sachs said, “It’s also important for policy authorities to avoid widening systemic concerns,” expressing caution about China’s sharp turn in policy.
China has led the world in successfully containing the new crown epidemic, and interest rates have been higher than in countries such as the U.S., attracting large amounts of money from overseas investors. But the situation has begun to change as defaults on foreign bonds have increased.
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