The first really meaningful and massive Chinese bankruptcy has arrived
Thursday, September 22, 2016
By Linette Lopez
Moral hazard has arrived in China.
According to the Chinese business publication Caixin, the
first of China's massive state-owned organizations has collapsed under the
weight of $2.2 billion worth of bad debt in China's interbank bond market.
The company, Guangxi Nonferrous Metals Group, filed for
bankruptcy nine months ago but only got approval from the Chinese government to
go bankrupt a few days ago.
This is different from other Chinese bankruptcies. It's
the first company in China's superliquid, over-the-counter interbank market to
go bust. Past bankruptcies involved only bank or corporate debt — this one
involves 108 creditors.
Of course, Guangxi Nonferrous Metals Group — a regional
company that used a local government financing vehicle to grow before it was
delisted in 2011 — had been suffering losses for years before it defaulted on bonds
The harder they come, the harder they
This is an all too familiar story for China's massive
state-owned (and quasi-state-owned) industrial, manufacturing, and property
companies. The building boom that expanded the Chinese economy over the last
decade or so must — according to the government — slow down, and the economy
must transition to one based less on that than on individual consumption and
services like banking and retail.
But for that to happen, companies that are limping along
must be put down in order to free up capital for healthier new enterprises. And
the goods they make — their overcapacity — have to find somewhere to go despite
a lack of demand not just from China, but from the entire world.
That is why Nomura wrote in a recent note that Guangxi is
just the beginning:
"This case will not be unique, in our view. We
highlighted the risk of rising defaults earlier this year, especially in
industries burdened with overcapacity. We continue to expect more defaults to
come. We believe that we may see divergence in the credit bond market.
"On the one hand, we expect the government to take
over some corporate debt, most likely in the form of debt swaps or bail-outs,
which will lower the risk and extend the maturity of some LGFV bonds. ... On
the other hand, however, more defaults and bankruptcies are likely to be
permitted, leading to a rise in risk premia."