Govt needs to handle debt issue carefully, but forecasts of crisis are too pessimistic

By Li Qiaoyi Source:Global Times Published: 2016-5-9 0:47:00

There have been increasing fears that rapid credit expansion seen recently as part of China's broader pro-growth efforts might lead to a debt crisis, with growing corporate defaults being reported and the country's seemingly ever-rising leverage potentially set to cripple the economy.

In the latest bond default case, Inner Mongolia Nailun Group, a fertilizer producer, said Thursday that it was unable to meet interest and early redemption payments maturing on Thursday. It was the 12th Chinese firm to default on bond payments so far this year, according to data provider Wind Information.

Meanwhile, The Economist said in a recent article that it's not a question of if, but when a debt bust occurs in China, citing the country's soaring debt-to-GDP ratio and the worrying issue of a portion of new debt being used to pay interest on existing debts, among other things. The article, which typifies pessimistic sentiment surrounding China's economy, expresses only the worst-case scenario, in which various unfavorable factors play a dominant role.

It makes more sense to look at underlying issues in a way that refrains from the habitual indulgence of either seeing China's rise as a threat or sounding the alarm that there's little left in the tank of China's giant economy.

Amid China's economic slowdown, many firms are seeing their profits dwindling and some are suffering growing losses, further adding to their difficulties in paying back debts. It can be expected that more and more firms will default. But even in the US, which has a more developed credit market, the bond default rate is between 1 and 3 percent each year and the figure soared to more than 8 percent in the two years after 2008 when the global financial crisis erupted. Therefore, as China is in a downward economic cycle, it is quite normal for there to be certain credit risks. In fact, it would be unusual if such risks were not reflected in the bond markets.

Certainly, allowing corporate bond defaults could create conflicts between stakeholders. That requires China to have a complete set of laws and rules in place to regulate corporate bond issuance.

And one of the key elements that should be covered in the rules are strict requirements for information and risk disclosure by corporate bond issuers and stern penalties for fraud.

Meanwhile, it is also necessary to work out a transparent mechanism for dealing with defaults as well as a detailed plan for asset restructuring. This is because defaults inevitably involve the interests of creditors and equity holders as well as the wellbeing of employees, and the potential impact on the local economy.

The author is a reporter with the Global Times.

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