As reported by Bloomberg, China is seeing a surge of new bankruptcies and defaults as Shanghai’s plans to torpedo insolvent companies drags on the domestic Chinese economy with investors continuing to take hefty haircuts on investments that have gone bad.
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“Bondholders could face considerable losses after bankruptcy proceedings, but what is more important is that they can learn how to fight for their rights via the legal system, and how to choose among debt proposals,” said Ivan Chung, an associate managing director at Moody’s Investors Service in Hong Kong.
China is steadily encouraging a financial system where the pricing of credit bears more relation to the risk of the borrower. Local and central authorities have for decades moved to support — or press creditors to support — troubled companies that could fuel unemployment and social unrest if they collapsed.
Local courts have accepted or plan to accept at least five bankruptcy applications from firms that defaulted on publicly issued bonds since early November. That’s roughly on par with the number seen over the previous four years. The new pace may continue: China’s top planning body called on Dec. 4 for local officials to clean up the debt of firms with excess production capacity or insolvent balance sheets by 2020.
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