A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads, Bloomberg News reported. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare. Authorities in other cases have encouraged workouts with creditors, raising questions about the Dongying examples. “The recent slew of bankruptcies sent shock waves through the bond market,” said Chen Su, a bond portfolio manager at Shandong’s Qingdao Rural Commercial Bank Co. “For bondholders, they can only expect to get a low repayment ratio through the bankruptcy reorganization — besides which it’s quite a time-consuming process.” Creditors would prefer direct talks with the company, Chen said. But authorities might have other ideas. Driving their potential concern: the pattern of private-sector companies guaranteeing each others’ debt. The maneuver helped encourage lenders to extend credit, but is now threatening systemic risks as one borrower gets in trouble, infecting others.
