STORY HIGHLIGHTS
China is the world’s biggest creditor but, it can’t keep up with its own EMIs. There is panic among global investors because among the defaulters are some major names.
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.
Chinese exporters are doing record business. Chinese pharma giants are selling vaccines – it’s a win-win story with lots of money flowing in. However, there has been a string of defaults in Chinese companies and not just some random businesses.
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. The lenders haven’t got their money back.
China is the world’s biggest creditor but, it can’t keep up with its own EMIs. 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 which has defaulted a huge debt.
The parent company of brilliance auto group is Huachen automotive which has defaulted as well. 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. The third name on the list is Yongcheng coal and electricity which was known as China’s grey Rhino but now it is known as a defaulter. 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 government-owned entities because it is considered a safe investment. 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 have something called local government financial vehicles. These are financing companies owned by the government. These government firms have abandoned bond sales or loan applications.
They are supposed to raise money for government projects but now they are struggling to get capital. The lenders aren’t confident about government bonds, so they are demanding higher interest rates.
The money is drying up and lenders are losing faith in China’s ability to repay. The popular perception is that China is flush with cash, however, it isn’t. China is mired in a debt crisis which is humongous and it remains hidden behind clever accounting and state concessions.
