As China’s economic growth rate tumbled to a 30-year low in 2019, corporate loan defaults surged to $18.6 billion, compared to $12.2 billion the year before.
The largest group of sour loans is among corporations that borrowed heavily to grow rapidly during China’s recent expansion.
Many government-owned companies are faring no better. Last November, Tewoo, a commodities trading firm backed by the city government of Tianjin, forced bondholders either to take write-offs of as much as 64 percent or wait a long time for repayment at sharply lower interest rates. The default called into question the financial health of the city itself.
Tewoo’s default also highlighted a quiet change in government policy: that state-owned firms may now be allowed to fail.
China’s answer to lagging growth: more debt. China’s banks have been ordered to relax lending standards and lower interest rates for borrowers starting or growing small businesses. The goal is to boost small-business lending by 30 percent.
During the first 10 months of 2019, banks loaned a record $286 billion to businesses that have had trouble getting capital. During that time, average interest rates fell from 7.4 percent to 6.8.
The campaign literally might not pay off. By May, banks were reporting that 5.9 percent of the new loans were defaulting, compared to 1.4 percent of loans made to established businesses.
“Our top priority is to meet the lending quotas rather than controlling risk,” said one bank officer.
China’s municipal governments also are struggling with unmanageable debt. Analysts estimate that the nation’s cities and towns owe about $6 trillion, not all of which is officially on the books. Cities and towns have depended on selling off land to pay bills but sales slowed; spending hasn’t.
At least one city has gotten an additional line of credit from the China Development Bank in exchange for giving the bank control over some of the city’s assets.
