China’s great debt restructuring has begun. According to Caixin News, Guangxi Nonferrous Metals Group Corporation was formally declared bankrupt on 12 September after several years of restructuring.
At first glance this may appear to be somewhat of a non-event, after all, they have been a number of corporate bankruptcies and restructurings across China already this year. However, as Nomura’s Asian economic’s research team points out in a research note issued earlier this week, the Guangxi Nonferrous Metals bankruptcy is a landmark case for China as it is the first bankruptcy case in the interbank bond market.
China’s great debt restructuring has begun
The Chinese bond market is one of the world’s largest and is closely watched for any signs of stress by economists. As China’s debt burden has grown to worrying levels over the past few years, there has been plenty of speculation about the sustainability of the debt and what it will take to send the whole tower toppling over.
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As part of its attempt to open up the country’s financial sector, China liberalized its domestic bond market during February of this year. Under the new scheme introduced by policymakers, foreign institutions can trade bonds directly through banks holding a Type A license.
The bankruptcy of Guangxi Nonferrous Metals was widely expected, but the very fact that policymakers have allowed the group to go bankrupt indicates a seismic shift in views from the government.
The group is a provincial state-owned enterprise that used to be a local government financing vehicle before being delisted in 2011. Between 2012 and 2014 the firm reported heavy losses and began to default on its bonds and notes in mid-2015. After failing to restructure its business, the group has now declared bankruptcy and will be liquidated.
Nomura believes that this won’t be the last of the last of the hard defaults and bankruptcies for China’s interbank bond market, nor will it be new unique. While the banks analysts believe that Chinese policymakers will step in to take over some corporate debt, most likely in the form of debt swaps or bailouts to extend the maturity of local government financing vehicle bonds, they also believe more defaults and bankruptcies are likely to be permitted by local governments as China continues to restructure its financial sector.
Outside the interbank market, the Financial Times reports that there been a total of 41 default cases in China’s domestic bond markets so far this year, more than the previous two years combined. Some 70% of these defaults were state-owned enterprises.