Recently, a number of large state-owned enterprises with AAA credit ratings have experienced a continuous burst of debt, and the credit bond market has been extremely nervous. Among them, Brilliance Auto was accused of transferring high-value assets before and after the debt default and evading debts in bad faith. Scholars believe that if the default of state-owned enterprises continues, it will have a huge impact on the state-owned banks, and even the entire mainland banking system.
In mid-November, Brilliance Auto Group, a key state-owned enterprise under The State-owned Assets Supervision and Administration Commission of Liaoning Province, announced that it had defaulted on a total of 6.5 billion yuan in debt and 144 million yuan in overdue interest.
A few days later, Shenyang Intermediate court of bankruptcy reorganization of the application of the ruling issued, Brilliance Auto officially entered the bankruptcy proceedings.
When it launched the three-year bond placement in 2017, Brilliance claimed its issuer rating was AAA. In April, executives also claimed to have plenty of cash, lots of land and state support to meet maturing debt.
A Shanghai-based hedge fund bought a bond issued by Brilliance earlier this year. Fund managers told Reuters that Brilliance’s default and bankruptcy came as a shock after the company’s management had not disclosed any financial troubles to investors.
Other large state-owned companies that have defaulted recently include Unlight Group, Salt Lake Industries and Yongcheng Coal and Power. Debts are huge, some in the hundreds of billions, and all have triple-A credit ratings.
“Before default, he should have given a warning, that is, a warning to investors,” said Tian Xie, a professor at the University of South Carolina’s Aiken School of Business. Obviously, these enterprises of the Communist Party of China, including his enterprise credit evaluation enterprise, in fact, it is Huaxin’s enterprise, in fact, he did not play the role of supervision, monitoring and warning at all. Caught the investor off guard. It is in effect completely complicit in defrauding the Investing public in China, which I think is actually a much bigger problem.”
A month before the bond default, Brilliance also transferred a 30 per cent stake in its Hong Kong-listed company, Brilliance China Automotive Holdings, to an affiliate, depriving creditors of the assets.
Yongcheng Coal & Power, which exploded just three weeks after issuing new bonds, has also transferred its stake in Central China Bank to two state-owned subsidiaries.
‘Defaults by state-owned enterprises are not new, but blocking creditors’ access to liquid assets is new,’ said Fan Lei, an analyst at Sealand Securities. ‘It’s like telling investors,’ I don’t want to pay you back. ‘
Reuters also cited several experts as saying that more than 90 percent of rated issuers in China received double A ratings or higher, leading investors to be misled into putting money into high-risk companies.
Brilliance’s sudden default has also been linked to a number of financial institutions.
As of last year, nearly 70 Chinese and foreign banks and trust companies had outstanding loans of 33.5 billion yuan to Brilliance, the Financial Times reported.
According to creditor filings as of September, Brilliance owed CCB $2bn and ICBC $642m respectively.
Two other state-owned policy banks, China Development Bank and Export-Import Bank, have also lent 2.5bn to Brilliance.
Gobi Dong, an independent scholar based in the US, said China’s financial volume was so large that the impact of a brilliance default might be limited, but the entire banking sector would be hit hard by a massive debt explosion by state-owned enterprises.
Gobi DONG, AN INDEPENDENT SCHOLAR from the United States: “Because of the nationalization of Finance in China, the Chinese banks actually have the largest bad debt rate in the world, the bad debt rate of the Chinese banks has reached 25 percent, almost a quarter. Brilliance and some corporate defaults are just the beginning, and they will continue to flare up. If it reaches a certain number, it could well be the end of China’s banking industry.”
Brilliance is now in talks with the liaoning province and its creditors, demanding concessions from banks to support the local economy, the paper said.
However, one creditor bank said that if the provincial government could not negotiate a good solution between Brilliance and the banks, it would slash its lending quota in Liaoning in the future.
Separately, Brilliance’s largest foreign creditor, Singapore’s DBS, holds nearly $780m in debt.
Michael GOBI: “For foreign companies like DBS, there is absolutely no guarantee of their economic interests and security in China. They must be the first victims of any disturbance. On the prosperous surface of the Communist Party, there are many foreign companies and foreign banks that cannot see the deadly crisis lurking beneath the totalitarian dictatorship in this vast economy.”
DBS also said that if brilliance’s debt negotiations failed, it would shake foreign investment institutions’ confidence in the business environment and economic outlook in northeast China.