Focus topics


China between state and market economy

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  • China has maintained a low default rate in its domestic bond market, dominated by SOE issuers. Even despite the recent surge in defaults since 2018, the rate remains much lower than the in the EU or the US.​
  • One important reason is that the central or local government will usually intervene and provide necessary support when SOEs are in financial trouble and face default risks. SOEs can rely on an implicit bail-out promise.​
  • This led to low credit spreads in the bond market, corresponding low borrowing costs and unconstrained credit expansion of enterprises. To counteract this “moral hazard”, regulators in China are shifting towards more market-based solutions for distressed SOEs. They are willing to accept certain SOE defaults in exchange for fairer credit risk pricing and better investment allocation.​
  • Consequently, in 2020, several SOE defaults (e.g., Huacheng group, a JV partner of BMW, and Yongmei, a local SOE) illustrate the determination of regulators to move away from the hidden bail-out promises. Further, the ratio of SOE defaults out of total defaults reached 43.6% in 2020, up from 10.1% in 2019.​
  • However, other policy goals such as employment, short term economic growth and social stability restrain financial regulators and delay the shift towards marketized default processes. In the Yongmei case, the SOE in Henan Province ultimately avoided default after obtaining support from other local SOEs guided by the Henan government.​
  • Interested foreign investors need to examine the credit spread of Chinese bonds carefully and assess whether the underlying governmental support is fairly priced.​

Sinolytics is a European consulting and analysis company focused entirely on China. It advises European companies on their strategic orientation and concrete business activities in China.

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