Unprecedented Growth Of China’s Economy: The End Of A Saga?
What lies ahead for China’s economy?
China’s economy has been amongst the biggest and fastest growing economies in recent years, fuelled by strategic state ownership of companies which dominate their industries. In hopes of raising capital for high priority projects, the government would often bail state-owned enterprises if they defaulted, ensuring the trust of foreign investors in the nation’s corporate bond market, now worth $4.4 trillion USD. However, given a slow down in economic growth and activity in China, the government’s resources to bail out companies may be dwindling, leaving investors to accept more market-based restructurings.
China’s Tewoo Group, a commodities trader wholly owned by the city government of Tianjin, is a recent example of a state-owned enterprise (SOEs) left to its own devises when it found itself unable to replay dollar debt. Investors were forced to take one of two options; Either take deep discounts on four outstanding bonds or exchange Tewoo bonds for that of another Tianjin-based state enterprises. This failure has left some analysts believing this is just the beginning of a series of defaults at government-backed groups. In an interview, S&P Global Ratings believed the example of Tewoo is not an exception, and ‘deteriorating fiscal profiles might also see eroding support for their uncompetitive and distressed SOEs’.
However, China’s defaulting SOEs aren’t the only worries of experts and analysts. China’s local government financing vehicles (LGFVs), used to finance real estate development, have been a driving factor of the rapid growth experienced by the nation’s economy. Following the near default of one of these entities, Ma Jun, a top adviser to the People’s Bank of China, warned of a possible ‘chain reaction of defaults among the country’s thousands of’ LGFVs, urging them to introduce ‘intervention mechanism’ to combat the risk associated with LGFVs.
The lack of an implicit guarantee by the state to bail out defaulting entities have had an impact on both vulture funds and investors alike. With yields on bonds steadily increasing, the number of vulture investors have also increased, hoping to buy cheap bonds already in default, to be saved by a government bailout. However, many of such funds have experienced million-dollar losses this year, as such bailouts have failed to materialise. Without the implicit guarantee from the state, a repricing of risk associated with SOEs will seem almost necessary, driving up borrowing costs and deterring potential investors. With the dive in investor confidence, one must wonder whether China will be able to sustain the rapid growth it’s experienced and continue to dominate the world market as one of the largest economies.
By Marcus Cheung