Moral hazard in airline bailout

Editorial | Mary Ma 9 Jan 2019

Beijing's reported US$550-million (HK$4.3 billion) bailout of troubled Hong Kong Airlines grossly violates the basics of market economy. But has China ever been a disciple of market-driven economy?

The state intervention via China Development Bank in the final hour will keep the carrier - based in Hong Kong but substantially owned by mainland conglomerate HNA Group - from defaulting on its bonds, due to mature in less than two weeks, hence potentially preventing the airline from slipping into a nightmarish scenario.

The move may have given the carrier a lifeline for now, but is Beijing prepared to repeat the same process when the next crisis occurs?

The current woes facing Hong Kong Airlines is a reflection of problems within the company. It's absolutely extraordinary to see so many board directors bail out during turbulent times. All in all, at least six have departed, including chairman Mung Kin-keung, followed by vice-chairman Tang King-shing, a former Hong Kong police commissioner.

Hong Kong Airlines is a full-service carrier like its local competitor Cathay Pacific Airways. Cathay has every right to feel jealous in wake of the development. While Cathay is struggling to stay in the air on its own in a difficult operating environment, its competitor is spared the consequences with state backing, no matter how lousy its operations have become.

The bailout of Hong Kong Airlines by Beijing is making competition in the SAR unfair.

The move to rescue an underperforming commercial operation by the state is setting an extremely bad precedent at a time when Hong Kong should be free from the mainland's controversial policy of advancing the state at the expense of the private sector.

In the longer term, what's happening right now would bode ill for the SAR's reputation as a free market.

Beijing policymakers apparently have a greater concern as they resolved to intervene. Over the years, mainland firms have been encouraged to raise capital by issuing bonds, leading to sky-high debts.

For instance, Hainan-based HNA, the substantial owner of Hong Kong Airlines, has been on a campaign to repay debts by selling marquee assets, including the pricey Kai Tak plots that it had purchased at stratospheric sums - using financing.

According to Bloomberg, up to 3.5 trillion yuan (HK$4 trillion) worth of bonds issued by mainland firms are due to mature this year.

That's a horrendously high wall to climb over. So, how much of these debts would be in default at the end of the year?

While answering this question now would be sheer speculation, it's certain that debt defaults soared more than 300 percent in 2018 from the previous year to hit 108 billion yuan. Financial professionals have been labeling it the debt tsunami.

Perhaps Beijing is concerned that although Hong Kong Airlines is a SAR carrier, allowing it to default on debts could initiate a knock-on effect to impact on the more iconic mainland giant HNA.

Should this happen, would it rock confidence great enough to set off a tsunami of a larger magnitude?

Then, how many Chinese companies can Beijing bail out?

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