![]() ![]() The People’s Bank of China has said it will pursue a “flexible, targeted and appropriate” monetary policy that supports the country’s recovery from the impacts of the pandemic. Borrowing conditionsĬhinese companies and their owners will be taking a keen interest in how more restrained credit markets and tougher financial regulation translate into borrowing conditions on the ground. Policymakers have strengthened financing rules for real estate developers like Evergrande, promised a “zero tolerance” approach to abuses in the China bond market, made a credit ratings firm compensate investors in defaulted bonds and drafted stricter regulations for its large fintech companies, which have also become major facilitators of loans. A more cautious approach would clearly point towards tighter financing conditions.Ĭhina has reinforced the signal it has sent by allowing more defaults with a much stricter approach to financial regulation. Market-driven investors and lenders now have no choice but to conduct careful analysis of borrowers’ businesses and financial positions. Nothing could be more effective in enforcing credit market discipline, though, than a rising default rate. China Evergrande Group, which was the world’s most indebted property developer with borrowings of nearly $120 billion last year, was able last September to secure $4.6 billion of funding from government-linked investors that averted this kind of scenario. ĭefaults by large companies that could have been much more destabilizing have also been avoided. In a market this size, that sends a meaningful message without causing much real damage. Only a handful have been allowed to fail, though, with total defaults by state-owned firms worth $11.1 billion last year. Financial regulationĭefaults by state-owned firms are a harsh medicine for investors that have long believed in an implicit government guarantee for such debts. In the China bond market, opacity was increased by inflated ratings that made credit differentiation much harder: two-thirds of bonds rated by China’s local agencies have a AAA or AA+ rating, including those issued by Yongcheng Coal. The relentless rise of shadow banking added opacity and systemic risk to the credit market. According to the China Banking and Insurance Regulatory Commission, this sector had swelled to have assets worth $12.9 trillion in 2019. It is now taking painful – but necessary – action.Īs corporate debt grew in the wake of that crisis, so too did China’s shadow banking system of so-called wealth management products, entrusted loans, peer-to-peer loans and other forms of financing. The government has recognised that its domestic credit markets had run out of control since the massive fiscal and monetary expansion that followed the Global Financial Crisis in 20. ![]() Look past the large numbers that are a product of China’s sheer scale and it becomes more nuanced, though. A more nuanced pictureĪt first glance, this is an alarming situation. That is driving market expectations that Local Government Financing Vehicles (LGFVs) will also default on their debts in 2021. At the same time, local government borrowing rose by the equivalent of $565 billion in the first half of last year, according to JP Morgan, even as tax revenues were depressed by the Covid-19 pandemic. There is a wall of corporate debt about to mature: some RMB7.1 trillion ($1.1 trillion) of domestic bonds and $104 billion of offshore bonds are due in 2021. These defaults included several state-owned enterprises, such as Yongcheng Coal & Electricity Holding Group, which would have been unthinkable in previous years. There are more causes for concern, though. For many investors, that would be worrying enough on its own. Chinese corporate borrowers defaulted on a record $25 billion of debt in 2020.
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