China faces wave of corporate defaults

Some economists have long feared that China’s economy with its unprecedented rise may one day burst like a bubble.  The so-called China miracle has occurred over the past 20 years. Yet, many experts believe that China’s economic miracle was not that miraculous. The country’s high-octane ascent was mostly a triumph of basic economic principles: open market and private. As a result, trade flourished, growth quickened, and incomes soared. Besides, the main engine for its growth was not inside the country but outside.

China managed to amass its capital and become one of the world’s leading countries thanks to its Western partners that provided China with jobs and loans from foreign banks. They also turned a blind eye to the theft of technologies and massive copyright violations. Thus, over 20 years, China has turned from a poor and politically weak country into a prosperous and powerful one. Funny enough, this simple lesson appears, however, to be lost on Xi Jinping. China’s government is rejecting decades of tried-and-true policy by attributing all the merits to the Communist Party and personally to General Secretary and President Xi Jinping. However, such a strategy may backfire. Even now China’s relations with many countries have been escalating.

China’s economy is currently overburdened with debt obligations, which account for almost 300% of GDP. Moreover, the country has been facing a big wave of corporate debt defaults. In the first half of the year alone, 25 companies defaulted on bonds totaling $9.67, a figure never seen before. This is the highest figure in the entire history of the market with debt obligations reaching $17 trillion, or 121% of GDP. The situation is aggravated by the fact that more than half of the defaults were recorded among state-owned companies.

For decades, Chinese state-owned companies have been taking loans, believing that they will never be allowed to reach default but this belief turned out to be a myth, Naoto Saito, the chief researcher at the Daiwa Institute of Research, said.