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Tuesday, May 28, 2024

China tells Business to Stand On Its Own Feet

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Graham Perry
Graham Perry
Experienced Arbitration Lawyer | China & Chinese Business Affairs | Public Speaker/Lecturer.

China is tackling debt.

No longer will central government bail out reckless borrowing by state companies. The decline of Yongcheng Coal and Electricity Holding is a pointer to the “get real” approach of China’s leaders.

With ample reserves of coal the banks were eager to provide cheap credit. The parent company, Henan Energy & Chemical Group, however, was struggling and forced Yongcheng to issue increasingly pricier bonds and borrow from China’s less regulated shadow bank sector. Yongcheng was then undone by a supply glut of ethylene glycol and borrowed more. Loans became too expensive and Yongcheng began to mislead lenders saying cash was to replenish working capital. Covid happened and bail out funding dried up.

China’s regulators will play hard ball. That is right. Debt funding cannot succeed but there has to be relief for innocent workers whose income has dried up. The Party will be aware – prosperity and stability are inextricably linked.

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