Rising debt defaults put financial stability at risk: analysts

By Xie Jun Source: Global Times Published: 2020/11/23 21:03:40

Workers make ambulance at the manufacturing base of the Brilliance Auto company in Shenyang, northeast China's Liaoning Province, Feb. 3, 2020. (Xinhua/Pan Yulong)

From halting Ant Group's IPO to announcing penalties for deliberate debt defaults by some companies, China has taken a firm attitude in preventing financial risks after irregularities emerged amid the country's recovery from the COVID-19 pandemic. 

Economists applauded such cautious management, saying that it is in line with the government's focus on financial stability, and the precautions will nip systemic financial risks in the bud. 

At a recent meeting of the State Council Financial Stability and Development Committee, officials said that the regulators will "severely punish" debt evasion, while having "zero tolerance" for financial violations such as the malicious transfer of assets, false information disclosure and misappropriation of the proceeds from stock and bond issues. 

The meeting was held weeks after the authorities published draft regulations for online small-loan businesses in what some media called the "strictest regulation in history". Unless they have special approval, online lenders can only operate within a provincial region instead of on a national level. 

An increase in bond debt evasion has also raised the alert among Chinese economists, as they said the trend might trigger financial risks on a larger scale, though debt default is not too serious a problem yet in China compared with average international default levels.

"Bond defaults are not unacceptable in themselves, but deliberate debt evasion is a challenge to the law, and would, if not cracked down on, harm the market's financing capabilities by destroying trust," Ding Meng, an economist at the Bank of China, told the Global Times on Monday. 

Recent defaults involving several state-owned companies, including a coal manufacturer in Central China's Henan Province and automobile giant Brilliance Auto, have jolted market and rattled investors, leading to a bond market sell-off. 

Li Fengwen, a consultant at a sub-bureau of the China Banking and Insurance Regulatory Commission, also pointed to bad loans as an area where risks might emerge. 

"Many banks postponed loan payment deadlines for enterprises that had problems as a result of the COVID-19 epidemic, but I think the risks were only postponed, not eliminated," Li told the Global Times, saying that the risks of non-performing loans should emerge next year. 

Apart from weaknesses in specific financial fields, economists mentioned general deficiencies that might give rise to financial hazards. Ding, for example, cautioned that future global financial markets movement might negatively affect China domestic markets and cannot be ignored.

"Potential risks might come from beyond the border, as the second round of economic lockdowns and a lack of strong government stimulus might cause foreign financial markets to tumble, and the influence might spill over into China's financial sector including its stocks, bonds and the foreign exchange market," Ding said. 

Zhang Hailiang, managing director of J&K Investment, said that the biggest risk in China's financial market is that some companies would take undue advantage of legal loopholes. From shadow banking to peer-to-peer lending, such speculation could generate risks even worse than the pandemic, he told the Global Times. 

He stressed that the government should execute management policies more thoroughly so that violations involving any amount would be penalized. 

Posted in: ECONOMY

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