China's big business borrowers in trouble

Finance | Bloomberg 15 Jun 2021

The size and type of defaults that have occurred in China recently indicate that the notion of "too big to fail" may no longer apply to the nation's borrowers, according to Goldman Sachs.

There has been a noticeable uptick in defaults by Chinese state-owned enterprises since late 2019 and some of the borrowers that have failed to repay debt recently, such as Chinese real estate developer China Fortune Land Development, have had large amounts of outstanding bonds, analysts including Kenneth Ho wrote in a report dated Friday.

"Even for large corporates or for state-related entities, policy makers are much less willing to extend support," Goldman Sachs analysts wrote. "Policy makers are now less likely to conduct full bailouts than compared with the past."

While the treatment of recent distressed cases in China indicates a waning of implicit government support for borrowers, it doesn't mean that there's no government backing, according to Goldman analysts.

Whether or not the government offers support will likely be influenced by the need to prevent systemic pressures and to limit contagion from any spikes in credit stresses, Goldman analysts wrote. They added that while systemic problems are unlikely to arise, idiosyncratic credit risks are likely to stay elevated.

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