Global investors worried as china major companies default – Burning Issues – Free PDF Download

• China says its economy is back on track and has asserted that it’s the only country that will show some economic growth by the end of this financial year.
• “China stands out as the only Fitch 20 country, in which we expect GDP to grow in 2020, but it is important not to underestimate the positive global spilloversthat will flow from China’s recovery,” it said.

• However, there has been a string of defaults in Chinese companies and not just some random businesses.

THE LENDERS HAVEN’T GOT THEIR MONEY BACK.

• These are big companies backed by the state which have been defaulting. They haven’t been able to pay back more than $6 billion this year in bad loans.
• China is the world’s biggest creditor but, it can’t keep up with its own EMIs.

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• There is panic among global investors because among the defaulters are some major names.
• The list includes Brilliance auto group which is BMW’s partner in China.
• The parent company of brilliance auto group is Huachen automotive which has defaulted as well.

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• Another big name is Tsinghua Unigroup which is a state-owned company which has also defaulted as it cannot repay the principal on a $450 million bond. The company owes $2 billion in additional debt and now investors are worried.

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• The third name on the list is Yongcheng coal and electricity which was known as China’s grey Rhino. It failed to pay back a bond worth a little more than $152 million what’s even more shocking is that this bond was rated “triple a” which is the highest possible rating that any bond can get in the market. “Triple a” bonds are considered the safest but in China a “triple a” bond just became a piece of junk. People invest these governmentowned entities because it is considered a safe investment.

WHY IS THIS A PROBLEM?

• The logic is: even if there is default, the government will rescue the company but in China this logic fails because the government can’t keep up with its own debt payments.
• China’s local government debt is expected to touch $4 trillion. Reports say there’s panic.
• Current and former officials of China’s finance ministry are raising an alarm and the risk of defaults is real.
• They are supposed to raise money for government projects but now they are struggling to get capital.

 IMPACT

• The defaults have angered global investors, who say their faith in the seemingly sound finances and implicit state backing has been violated.
• “If the company had told investors it was in great trouble, I wouldn’t have bought and held the bonds,” said Shanghai-based hedge fund manager Vincent Jin, who bought Huachen bonds early this year.
• Huachen boasted an AAA issuer rating when it launched its 1 billion yuan ($151.93 million) three-year, privately placed bond in October 2017.
• China watchers say allowing too many defaults could jeopardise the financial stability and near-term recovery.
• Analysts at Goldman Sachs recently pointed out that widespread failures in the sector could spill over into the banking system, causing banks to cut back on lending more broadly, or increase interest rates, the latter of which is already starting to happen.

WHY DID IT HAPPEN?

• Chinese companies have been piling on debt for at least a decade, ever since the leadership team under President Xi Jinping’s predecessor responded to the 2008 crisis by going on a borrowing binge.
• That kept China’s economy chugging, but at a cost. The corporate debt to GDP ratio surged to a record 160% at the end of 2017, from 101% 10 years earlier.

THE STARK REALITY

• The money is drying up and lenders are losing faith in China’s ability to repay. China is mired in a debt crisis which is humongous and it remains hidden behind clever accounting and state concessions.

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