Chinese companies default amid rising debt bubble

New DelhiWritten By: Gravitas deskUpdated: Oct 19, 2021, 10:34 PM IST

Evergrande-China's largest property group by sales Photograph:(Reuters)

Story highlights

In the first half of 2021, China's corporate defaults hit $18 billion which is a record high.

China's major real estate players have been defaulting on their debt payments amid the Evergrande crisis.

Three more Chinese companies have now reportedly run out of cash. They include Sinic Holdings, China Properties Group and Fantasia - all three have defaulted just like Evergrande. 

China has now unleashed a financial pandemic as the Chinese economy has now become like a house of cards with weak foundations. After Evergrande, China's economic boom has begun to unravel with its economy fuelled with debt.

Leading Chinese companies are facing bankruptcy with factories shut as there is no electricity and China's foreign creditors are showing signs of distress.

Evergrande is the world's most indebted real estate developer. It owes more than $300 billion even though it paid some of its Chinese creditors, however, it is clearly not good enough. The virus of bad debt has infected companies well beyond Evergrande. 

Sinic Holdings defaulted today. It had to pay $246 million worth of bonds but failed just like Evergrande. Sinic Holdings is a real estate developer.

Last week another developer had defaulted - China Properties Group. It couldn't pay back $226 million worth of bonds. Earlier this month Fantasia Holdings defaulted on a $206 million payment.

These are the defaults from just this month and they represent just the tip of the iceberg. Major Chinese companies have been defaulting on their loans for a while even before the Evergrande crisis hit the country.  

In the first half of 2021, China's corporate defaults hit $18 billion which is a record high. These were loans in the form of bonds. 

A total of 25 companies defaulted and more than half were state-owned companies. In 2020, Chinese state firms had defaulted on more than $11 billion worth of debt as they couldn't pay back on time. It was the largest ever default by state-run companies in China.

State-run companies are doing worse than the private sector in China. In 2020, they accounted for 51 per cent of all defaults in the country. Chinese companies which were earlier considered to be safe have been failing to repay loans.

Last year, 82 per cent of Chinese bonds with an investment-grade rating defaulted as companies could not repay the money. It included bonds from both private and public enterprises. 

Their bonds were rated "double A+" which meant the company was financially sound and had enough money to pay its debt and the risk of default was apparently low, however, 82 per cent of "double A+" bonds failed. 

There is a dangerous debt bubble in China and it is proving to be a ticking time bomb which the Chinese officials have tried to hide. China's overall debt now stands at well over 270 per cent of its GDP.  

China's outstanding foreign debt reached $2.4 trillion last year. The crisis has been made worse with "hidden debts" which no one knows about like the borrowings by local governments which lack transparency. The state is the biggest borrower in China as local governments depend on off the books borrowing. In 2018, Standard and Poor's had estimated that hidden government debt could be well over $4 trillion in the country. 

China had tried to clean its house quietly but the defaults have brought the truth out as it struggles to put the debt genie back in the bottle.