Defaults, frauds and dodgy deals in China’s financial sector are piling up at a rapid rate.
That’s an index of increasing stress, as growth slows and debt-servicing costs rise.
Multiple interest-rate cuts over the course of 2015 don’t yet appear to have tamped down financial dysfunction.
Instead, they risk increasing latent problems as corporates extend borrowing and investors reach for yield.
Bloomberg Intelligence Economics has tracked reported incidents of financial stress in Bloomberg News and key Chinese business publications.
In 2015, the number rose to 38, up from 12 in 2014 and 3 in 2013. They ranged from a missed payment on 26 million yuan (US$4 million) in corporate debt by a Hainan real estate developer, to fraud involving 48 billion yuan by the Ezubo peer-to-peer lending platform.
The amount of money involved has also increased.
In 2015, 137 billion yuan in total was involved in incidents of financial stress, averaging 3.6 billion yuan per case. In 2014, the total was just 15 billion yuan, and the average was 1.3 billion yuan. In many cases, stress occurred over a missed payment or some portion of the borrowing, not the entire principal.
So far in 2016, there have been nine cases, with a total of 5.7 billion yuan at stake.
China Shanshui Cement heads the list with its default on a 1.8 billion yuan bond.
It’s likely that part of the increase in the last few years reflects a reporting bias, with newsrooms devoting increasing attention to financial problems as interest in the subject grows.
In general, the sector pattern follows what would be expected from the slowdown in China’s old industrial economy, a slump in commodity prices and the relative resilience of demand for consumer goods and services.
Taken together, the industrials and basic resources sectors account for close to half the reported incidents. Defaults by high-tech, services and consumer-focused firms are few and far between.
Reports of financial stress are concentrated in China’s most developed provinces – with Guangdong and Beijing near the top of the list.
Inland regions and the rust-belt northeast have the biggest problem with rising debt and fading growth. But they have basically no reports of financial stress.
That might reflect a concerted attempt to manage incidents away from the public eye. Or it might be because journalists focus attention on the big eastern cities.
One striking facet of the database is that though very few cases of financial stress have touched retail investors, some of the biggest and most recent have.
Just seven of the 63 cases affected retail investors, and in two of those, default was avoided. That said, the Ezubo ponzi scheme and the Fanya metal exchange — where investors are chasing 40 billion yuan in missing funds — are the two largest cases on record.
Looking further into 2016, low interest rates and ample supplies of credit should help keep a lid on defaults.
But by allowing corporates to continue accumulating debt and encouraging investors to reach further for yield, that will likely allow problems below the surface to continue to grow.
The views expressed in this article are those of Tom Orlik and Fielding Chen, economists at Bloomberg Intelligence.
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