Since taking off five years ago, China’s debt market has had the appearance of a one-way bet. The country’s turbocharged growth meant corporations were typically in good enough financial health to pay back their loans. But even those companies that ran into trouble did not face the risk of default, since the government would order state-owned banks to ride to their rescue. The same principle applied to local authorities, which were put in the position to borrow large sums of money via off-balance sheet financial vehicles.
The era of riskless borrowing came to an abrupt end this month, when the authorities decided to let Chaori, a solar-cell maker, miss an interest payment on a bond, triggering the first default in China’s modern history. It will not be the last. Li Keqiang, premier, has since made it clear that more defaults are “unavoidable” in the Chinese economy. The authorities are now mulling over the fate of Zhejiang Xingrun Real Estate, a provincial developer that is struggling to repay Rmb3.5bn ($569m) of debt.
Beijing’s willingness to allow defaults to happen is welcome. Widespread moral hazard across borrowers and lenders is one of the reasons credit growth in China has spiralled out of control, with total debt rising sharply from 130 per cent to 210 per cent of national income in just five years. Fearing for their money, investors will now be more careful about whom they lend to. Forcing operators to differentiate among companies is a necessary step on the road to interest rate liberalisation. In a market where the government bails out all lossmaking institutions, the cost of credit will not reflect true economic conditions.
However, a more laisser faire approach towards defaults carries risks, both politically and economically. China’s corporations are deeply interconnected via long credit chains. Large state-owned corporations often act as guarantor for the debt of smaller companies in a region. Letting a giant fail could trigger a cascade of bad loans, which would severely hurt the banking system. Furthermore, many retail investors have lent their money with the implicit understanding that the state would step in to help if needed. Breaching this unwritten contract in order to enforce market discipline could lead to a political backlash.
There are three ways in which Beijing can minimise the risks of bankruptcies having damaging spillovers. One is to boost transparency in the credit market, forcing banks to shrink their large shadow banking vehicles and bring more loans on to their balance sheet. Banks should also be more open about where savers’ cash is invested. Too often depositors are unaware that their money is funding high-risk bets, especially in the property market.
Second, Beijing must be careful when picking which corporations are allowed to go bust. So far, the authorities have been wary of letting institutions that pose systemic risk default. Last January they rescued China Credit Trust, a Rmb3bn high-yield investment trust. This caution makes sense. Yet the decision to save a troubled company must hinge purely on systemic considerations, rather than on the strength of its connections to the government.
Finally, the authorities should equip China with a bankruptcy regime that can handle failures both of financial and non-financial institutions in an orderly manner. These regulations will take time to set up, but one of their guiding principles must be that the investors that took the greatest risk suffer the biggest losses. The danger, of course, is that political considerations will trump the rule of law. But if China is serious about diversifying the pool of available lenders away from its state-owned banks, investors must be given guarantees that they will not be defrauded.
就在这个月，无风险举债的时代戛然而止。中国有关部门决定听任太阳能电池制造商超日太阳能(Chaori)无法如期偿付债券利息，从而引发中国现代史的第一起违约。这起违约不会是最后一起。这件事发生后，中国总理李克强已明确表示，中国经济出现更多违约是“难以避免”的。如今，中国有关部门正在考虑如何安排浙江兴润置业(Zhejiang Xingrun Real Estate)的命运，这家省级地产开发商目前已难以偿还35亿元人民币（合5.69亿美元）的债务。
其次，中国政府在选择允许哪些企业破产时必须十分小心。到目前为止，中国有关部门对允许那些会构成系统性风险的机构违约一直持谨慎态度。今年1月，他们纾困了中诚信托(China Credit Trust)，该公司是一家资产规模达30亿元人民币的高收益投资信托。这种谨慎态度是有道理的。不过，在决定是否要拯救一家陷入困境的企业时，必须把系统性因素作为唯一依据，而不要考虑该企业与政府的关系有多强。