China defaults11/3/2022 ![]() ![]() State-owned enterprises (SOEs) appear to be adopting more structured debt workouts than privately owned enterprises (POEs). This motivates creditors to seek out-of-court settlements that they believe will provide a higher recovery.Ĭhart 1 Differences Arise Between State-Owned And Privately Owned Entities In our view, this is due to the limited experience of lenders and investors, given the short history of China's bankruptcy law and of defaults in the country's bond market, which saw its first case only five years ago.įear of a low recovery is also a likely cause, given courts that administer liquidations are not required to maximize the sale price of the assets to be liquidated. Rather, creditors and officials have pushed for different options, often seeing bankruptcy courts as a last resort. ![]() This is not because the legal framework lacks specificity. Transparency on debt resolutions would give international investors more confidence to enter this market.Ĭhinese defaults have had widely varying outcomes. The recovery process is slow and unpredictable. This low participation, despite the opening of Bond Connect three years ago to encourage foreign buying, is partly due to high uncertainty and poor outcomes in default cases. Why Post-Default Events Vary WidelyĬhina's debt market is huge, but international investors only hold some 2.4% of the country's onshore bonds. International investors will find these changes encouraging as more enter the country's bond market, the world's second largest with about US$15 trillion outstanding. They establish a key template for debt workouts as China improves its restructuring, resolution, and recovery regimes. The highest-profile debt events this year shed light on what to expect on Chinese defaults. We anticipate more such cases as defaults rise in China. ![]() They raise transparency, facilitate resolutions, and make outcomes more predictable. S&P Global Ratings sees these cases as positive for China's credit markets. dollar bonds, and growing recognition in the country that court action may be preferable to out-of-court negotiations that drag on for years. The trigger: precedents set by landmark defaults involving U.S. Trialed in 1986, expanded in 1991, and updated in 2006, China's Enterprise Bankruptcy Law has only this year become important to international investors. As more entities are allowed to default, investors will have more transparent and predictable means to recover their investments quickly. We believe authorities want such cases to serve as examples. #CHINA DEFAULTS SERIES#
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