Home World China’s debt will explode in a series of thunder and economic difficulties (photos) | Wenlong Real Estate |

China’s debt will explode in a series of thunder and economic difficulties (photos) | Wenlong Real Estate |

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Companies in all sectors of the Chinese economy are burdened with high debts. (Image source: Adobe stock)

[Look at China News on November 17, 2021](Look at a comprehensive report by Chinese reporter Wenlong) ChinaeconomyCompanies in all industries are burdened with highdebtreal estateDevelopers have begun to default, local government debt is also at risk, and defaults are expected to continue to increase.

Bond defaults will be more likely to explode in series

On November 17, according to the latest report from the international rating agency Moody’s, Chinese corporate bond defaults are expected to continue to rise in 2022. A series of explosions are likely to occur because real estate developers with high debts, as well as companies in various industries and companies controlled by local governments have difficulty obtaining new funds after years of borrowing frenzy.

Moody’s wrote: Beijing authorities will encourage troubled Chinese companies to restructure or liquidate their debts through courts. But if bond defaults surge and trigger systemic risks, the authorities will step in to ensure stability.

In the first three quarters of this year, onshore defaults of Chinese non-financial companies increased by 19% to US$15.5 billion, while offshore defaults this year increased by 28% to US$7.8 billion, reflecting the tightening of financing channels and increasing investor risk aversion. The amount of offshore defaults in the first nine months of this year exceeded that of the entire year of 2020.

The Beijing authorities have worked hard to control the real estate bubble and issued measures last year to make it more difficult for developers who rely too much on debt expansion to obtain bank loans and cut off an important source of liquidity. In recent months, high-debt real estate developers such as Evergrande Group and Kaisa Group have faced the outbreak of a debt crisis and the payment of offshore debt interest.

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When the Beijing authorities are “disposing bombs” of debt, they are more focused on maintaining social stability and avoiding large-scale mass incidents. Therefore, the construction of the new building site continues, and the pre-sold real estate has to be handed over to the owner, and the financial products have to be repaid. As for the large number of holders of US dollar bonds, they are not considered until the end.

Furthermore, the interest rate on bonds issued by Chinese companies has soared to a 10-year high, and the risk of default is extremely high. Unlike in the past, the reform method adopted by the Beijing authorities this year is unusual. The supervision of the education and training industry to the Internet of science and technology has been implemented in one step and is very strict.

In the past, every time the property market slowed down, developers burst into debt crises, and in the end they were rescued by the government, indirectly blowing up China’s huge real estate bubble. Those brokers who ignore the developer’s indulgence in debt and continue to help them issue bonds, as well as investors who are greedy for high interest rates, will be punished in the future.

Bond defaults have set off a real crisis. For many years, bond issuers have relied on issuing new bonds to repay old debts.

In fact, overseas bond terms provide a higher degree of protection for investors. For example, negative pledges, which refer to borrowers guaranteeing lenders that they must not set any assets on their property until they pay off the loan. A legal form that is conducive to other creditors. To put it simply, a negative guarantee is to ensure that the company cannot take the assets under its name as a guarantee.

Many international organizations believe that the current high-yield bond market in China is actually shrinking. If we can improve the transparency of default settlement and strengthen investor protection clauses in the future, it will increase the confidence of international investors in entering China’s credit bond market, thereby driving the scale and liquidity of China’s high-yield bond market. Many companies are able to issue bonds for financing, which really promotes direct financing.

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However, China is now faced with unfavorable factors such as the birth population, the decline in the number of marriages, and the economic downturn. In addition, the authorities are in a dilemma in dealing with the real estate industry. People from all walks of life are not optimistic about how the crisis can be resolved.

Local debt is a huge thunder

Data show that the growth rate of China’s local government debt has accelerated significantly. The issuance scale in October increased by hundreds of billions of yuan from the previous month, which was the third highest in the year. The Ministry of Finance of China stated on October 22 that the new special bond quota for 2021 should be issued as far as possible before the end of November. Local governments are accelerating the issuance progress. In October, the scale of special bond issuance exceeded 640 billion yuan, a new high in the monthly issuance scale during the year. So far this year, the cumulative proportion of special debt has also risen to more than 60%.

According to a report released by Goldman Sachs in October, China’s total local debt has increased from 16 trillion yuan in 2013 to 53 trillion yuan by the end of 2020. This figure is equivalent to 52% of China’s GDP, and is higher than the official government’s total outstanding debt.

Local government financing platforms are borrowing channels through which governments in various parts of China can keep loans from appearing on their balance sheets. However, financial markets still treat them as local government liabilities.

The so-called local financing platform refers to the establishment of a local government initiated by the local government, through the allocation of land, equity, fees, national debt and other assets, quickly packaged out a company whose assets and cash flow can meet the financing standard, supplemented by financial subsidies when necessary. Repayment commitment to achieve the purpose of undertaking funds from various sources.

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China’s economic growth is now facing more headwinds, including sluggish consumption, sluggish domestic demand, declining demand for land caused by real estate developer debt, power cuts, and supply chain disruptions caused by the epidemic, all of which are thorny issues for the Beijing authorities.

The Goldman Sachs economist Wei Jingxian who wrote the report found that most of China’s local government financing platform debt is concentrated in industries such as infrastructure, transportation and industrial groups, which together account for nearly 40% of the total debt. Among them, Jiangsu Province has the largest debt in the country, reaching about 8 trillion yuan last year.

In response, Wei Jingxian wrote in the report, “It may require more official local government bond issuance and increased flexibility in local government financing to support overall economic growth.”

Goldman Sachs’ calculations are based on an analysis of interest-bearing debt statements of more than 2,000 local government financing platforms, including bonds and bank loans. In addition, the report also mentioned that about 60% of China’s local government financing platforms issued bonds to raise funds to repay debt due in 2020 to 2021, rather than for new investment.

Editor in charge: Xin He Source: Look at China

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