Apr 21 2015 at 3:00 PM
Updated Apr 21 2015 at 6:20 PM
China on default watch as companies buckle under big debt loads
Baoding Tianwei could become the first state-owned company in China to default. Reuters
by Lisa Murray
State-owned energy group Baoding Tianwei has become the latest Chinese company to struggle with its debt load, admitting it did not have adequate funds to meet interest payments due on Tuesday.
The announcement came just a day after troubled Chinese property developer Kaisa defaulted on its overseas debt and puts the spotlight on the country's rising corporate debt levels.
China has one of the highest levels of corporate debt in the world at 125 per cent of gross domestic product, according to a report released by the McKinsey Global Institute in February.
Baoding Tianwei, which makes power transformers and is a subsidiary of central government-owned China South Industries Group, was hit by a 10.4 billion yuan ($2.2 billion) loss last year, due to poor investments in new energy assets. The company has been losing money since 2011 and accumulating debt.
If confirmed, it would be the first state-owned company default in China so far, a sign the government is becoming more willing to allow struggling firms to fail as it looks to avoid unnecessary bailouts.
"This is a good starting point to build up a more sophisticated credit environment for China," said ANZ's Shanghai-based economist Zhou Hao.
PAYMENT 'UNCERTAINTY'
Baoding Tianwei has already been in dispute with China South over payments so analysts are tipping the parent company won't bail it out. In 2011, Baoding Tianwei raised 1.5 billion yuan via a five-year bond issue that matures in April this year. The company said it did not have the funds to meet the 85.5 million yuan interest payment due on Tuesday and there was "uncertainty" about whether it could pay.
Baoding Tianwei's woes follow an announcement on Monday that Kaisa failed to meet two US dollar-denominated interest payments, making it the first China property developer to default on its overseas debt.
Kaisa, based in the southern Chinese city of Shenzhen, has struggled to service more than US$10 billion in debt owed domestically and overseas since becoming embroiled in a corruption investigation late last year. The government stopped approving its new development projects, prompting management to seek a restructure of its debt, which was much higher than expected.
While the problems of both companies were compounded by poor management decisions, their struggle to pay back their debts has raised concerns about a broader issue in the corporate sector.
RAPID ACCUMULATION OF DEBT
China's total debt has reached 282 per cent of GDP, more than the average for developing countries and higher than developed economies such as Australia, the United States, Germany and Canada.
And the debt has been accumulated rapidly. Since 2007, the Chinese economy has added US$20.8 trillion of new debt, accounting for more than a third of the global growth in debt.
China's corporate debt problems came to the fore last year amid concern about its fast-growing shadow-banking sector and slowing property market, which some analysts tipped could lead to a series of defaults.
There was much debate about whether China had reached its "Bear Stearns" moment, referring to the first defaults that signalled the looming collapse and rescue of the New York investment bank in 2008.
However, a high number of defaults never eventuated as companies rolled over their debt, putting off payments.
Andy Rothman, investment strategist for Matthews Asia and a self-described China optimist, said corporate debt levels had been rising rapidly.
"The key question is can those companies service the debt," he said.
"The majority of corporate debt is with the state-owned enterprises."
Mr Rothman said based on some calculations he had seen, private sector companies were already deleveraging.
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