First Corporate
Bankruptcy in China and how the Central Bank is addressing the problem by
Martin Armstrong, 7/23/18.
The first debt
bankruptcy of a major corporation in China has now taken place here on schedule
in 2018. This first bankruptcy of a major corporation was due to
over-indebtedness which occurred in the current year. The South China Morning
Post reported that coal company Wintime Energy has been forced to cease
operations after failing to repay a central government bond. The company had
recently accumulated a debt of 72.2 billion yuan (about US$10.8 billion). The
company’s debt had quadrupled over the past five years.
This failure is
attributed to difficulties at Wintime Energy with respect to a change in
corporate governance strategy that was announced by the central government in
Beijing back in 2016. Since then, the authorities have been trying to prevent
excessive borrowing by the corporations fearing a debt crisis was building. As
a direct result, the previous excessive lending in the shadow banking market
came to a virtual standstill. Previously, the government had actively
encouraged companies to raise fresh capital by issuing corporate bonds. The
Chinese bond market doubled in size within a few years going into 2016.
Today, there is about
$12 trillion US dollars outstanding, which makes Chinese corporate debt the
third largest bond market in the world.
This certainly casts a
cloud over all the forecasts that have claimed the death of the dollar and the
rise of the yuan.
With the encouragement of the government to sure-up capital, a massive borrowing process became increasingly out of control without the management skills necessary to understand that there is such a thing as a business cycle.
Additionally, the
buyers of corporate debt lacked information and experience with debt. There was
precious little credit analysis experience in China, which is still maturing,
and local rating agencies also did not have the competence to understand debt
and currency fluctuations particularly when debt is issued in dollars.
Consequently, many fear that there was virtually no due diligence until the
government allowed bankruptcy for the first time in 2014 and many see this as a
parallel for the crisis in bad debts held by Italian banks that also lacked
proper analysis of their books.
China’s economic
growth has been exploding led by corporate expansion and debt accumulation.
This is the concern over the next two years and how the economic engine of
China can experience its first real recession moving into the bottom of the
Economic Confidence Model in 2020. The Central Bank has been injecting
liquidity into the markets on a large scale. The government is thereby
injecting cash, but this will still need to be repaid in one year at about 3.3%
interest rate.
The Central Bank is
dealing with the issue directly unlike that central banks in the West who
indirectly attempted the stimulus through banks just hoping they would lend out
the funds, which they did not. Medium-term notes were first offered directly by
the Central Bank to the country’s companies and commercial banks back in 2014.
The collateral used is securities pledged by the borrowers.
I have pointed out
that this is the PROPER way to manage a central bank. The Federal Reserve was
originally set up to “stimulate” through buying corporate paper DIRECTLY. That
structure was altered by Congress whereby the Fed was directed to buy US
government debt exclusively. Therefore, the Fed bought US government bonds
hoping the money would find its way into the economy. That effort failed. The
Central Bank of China is actually managing the crisis in the proper manner and
this will not prevent the downturn, but it will moderate the damage.
Norb Leahy, Dunwoody
GA Tea Party Leader
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