State-owned enterprises no longer sacrosanct . . .
Chinese state-owned enterprises (SOEs) are getting the stick. Under a new “zero tolerance” policy, Vice Premier Liu Hu said earlier this week that Beijing would “severely” crack down on Chinese SOEs’ illicit bond financing. Hu’s comments follow a series of substantial payment defaults, most notably at Yongcheng Coal & Electricity Holding Group, one of China’s largest coal companies. Earlier this month, it missed a C$199-million debt payment and now faces a potential debt default of C$5.3 billion. Until recently, the notion that a large Chinese SOE could miss a debt payment was unimaginable. Investors held as gospel the belief that Chinese SOEs had an implicit guarantee from their local government regardless of financial health. This implicit status no longer stands, and the new reality is shaking up China’s corporate bond market. In the wake of Beijing’s rebuke, many SOEs have suspended bond issuances. Pundits expect further defaults in the coming weeks.
Blame the spectre of shadow banking . . .
To date, Chinese SOEs have relied on debt to fuel their ever-expanding appetite for acquisitions and growth. And China’s shadow banking sector (unregulated lending by non-bank entities) offered up a ready pool of capital for SOEs. However, before the pandemic, Beijing had begun to crack down on the sector and implored provincial-level governments to “tell the truth” about the actual state of their local economy and SOEs.
The end of an era – Chinese SOEs no longer acquiring the world . . .
Following the 2008 financial crisis, there was a time when Chinese SOEs were free to pursue a debt binge and go on the hunt for international assets – notably in Canada’s oil sands – to help fuel their corporate growth aims. However, the ballooning debt-to-GDP ratio this helped create started to worry Beijing. In an attempt to deflate the bubble, Beijing now appears to be pursuing a strategy of controlled default. How this strategy will impact Chinese SOEs who have invested in Canada is yet to be seen.