The Chinese are unable to maintain the facade anymore. The bad news about their economy keeps dribbling out. From Tyler Durden at zerohedge.com:
Two months ago, when looking at the soaring number of bond issuance cancellations and postponements as calculated by BofA, we commented that it was only a matter of time before the long overdue tide of corporate defaults, held by for so many years by the Chinese government which would do anything to delay the inevitable, was about to be unleashed.
This prediction has indeed been validated and as the FT reports overnight, Chinese bankruptcies have surged this year “as the government uses the legal system to deal with “zombie” companies and reduce industrial overcapacity as part of a broader effort to restructure the economy.” In just the first quarter of 2016, Chinese courts have accepted 1,028 bankruptcy cases, up a whopping 52.5% from a year earlier, according to the Supreme People’s Court. Just under 20,000 cases were accepted in total between 2008 and 2015.
This is surprising because while China’s legislature had approved a modern bankruptcy law in 2007 it had barely been used for years, with debt disputes often handled through backroom negotiations involving local governments. “Bankruptcy isn’t just about creditor-borrower relations. It also touches on social issues like unemployment,” said Wang Xinxin, director of the bankruptcy research centre at Renmin University law school in Beijing. “For a long time many local courts weren’t willing to accept them, or local governments didn’t let them accept.”
However, following the dramatic collapse of global commodity prices, which as we showed last October meant that more than half of local companies could not afford to even make one coupon payment with cash from operations, Beijing had no choice but to throw in the towel. And as the FT adds, “bankruptcy courts have been recruited into China’s drive for “supply-side reform”, which centres on reduction of overcapacity in sectors such as steel, coal and cement.”
Still, even with the surge in defaults there are concerns that the bankruptcy law will allow some zombie companies to continue operating. In guidance to lower courts, the supreme court has said they should, where possible, use mergers or restructuring rather than liquidation, in order to allow a company to emerge from bankruptcy as a going concern. This month the court provided several case studies of successful bankruptcies, all of which kept companies in business.
All of this goes back to the core concern and threat facing the Politburo: mass layoffs as a result of liquidating insolvent companies, leading to millions of unemployed, low-skilled workers. It is also why despite all the rhetoric of “reform”, China has been aggressively stoking its credit bubble and pumping trillions in loans into questionable business ventures and insolvent corporations.
For some the surge in bankruptcies is not enough: “We shouldn’t promote simple slogans like ‘use more restructuring and less liquidation’. That’s not really accurate,” said Li Shuguang, professor at the China-EU School of Law at China University of Political Science and Law. I personally think liquidations should be used more. Only enterprises with real value should be saved. The most important [thing] for zombie firms is to liquidate them. Then we can find better ways to deal with laid-off workers, like retraining and re-employment.”
To continue reading: Chinese Bankruptcies Surge More Than 50% In Q1; Worse To Come
