BEIJING (Xinhua) — According to a Nomura report, China’s bond defaults are becoming more concentrated in a region of the world, where development could be hampered by new carbon pollution restrictions. According to Nomura’s figures released on April 27, fifteen regions in China’s northern half, including Beijing and Inner Mongolia, accounted for 63.4 percent of national bond defaults last year, up from 51.5 percent in 2019. It’s the latest indication of the country’s widening economic divide, with the north’s GDP and population growth still lagging behind that of the south. Now, China’s commitment to curb carbon emissions by 2030 means that export limits will be placed on the economy of the northern region. North China, where the bulk of steel, aluminium, and other raw materials are manufactured and refined, may be particularly hard hit by the recent environmental initiative, according to Nomura analysts.
Historical determinants
Many state-owned enterprises and heavy industry can be found in North China. As a result, starting in the late 1980s, when China started to reduce the position of state-owned enterprises in the economy, the region was adversely affected, resulting in the loss of many jobs. Meanwhile, the provinces of Guangdong and Jiangsu in South China have more export centres. Shanghai and Shenzhen are two of the region’s main cities, and it was one of the first to profit from China’s decision to open up the domestic market to more international and privately-owned companies. According to the Nomura economists, historical conditions, as well as overcapacity built up after the 2008 financial crisis, have led to more weakness in the north. They report that North China contributed just 35.2 percent of national nominal GDP last year, with per capita GDP in South China being about three-quarters of that.
The north is much more reliant on loans. According to Nomura, outstanding corporate bonds in North China soared to 52 percent of GDP in 2020, compared to 30 percent in South China. According to the study, “the north/south divide could become an important consideration for credit distinction in the years ahead.” “In reality, we have already seen some decline in the North China provinces’ ability to access bond markets for funding.” According to the researchers, the north accounted for 10% of national corporate bond issuance in the first year, down from 42% for the whole year.
Investors are becoming more wary of increased threats
Increased pressure on the north comes as defaults in China as a whole are increasing, especially among state-owned enterprises, which investors previously assumed had tacit government support. Although defaults are still low in comparison to the overall market, the pattern will cause investors to distinguish between different bond issuers, according to Ivan Chung, head of Moody’s Greater China credit research and analysis unit. Issuers have cancelled bond issuance in the last month or so, according to Chung, for two reasons. One reason, he claims, is that the issuer was too inexperienced to draw much investor interest. The other is that, considering their high quality, investor sentiment has pushed up bond prices, making them prohibitively costly.
In April, investors expressed fear that Huarong, the state-owned bad debt manager, would be unable to meet its obligations. Separately, Chinese financial media portal Caixin announced, quoting a government official, that 24 companies funded by the provincial government of Henan intend to set up a 30 billion yuan ($4.6 billion) fund, to finance local enterprises in the event of debt threats. Henan is included in Nomura’s “North China” classification.
Investing in a green energy transition
Tapering pressure on carbon-intensive projects might not be enough as China tries to strike a balance between development and carbon reduction. In a system where the major banks are state-owned and tend to lend to equally state-backed companies, privately-run renewable energy businesses will find it difficult to obtain financing. According to Reuters, which cites data from Refinitiv, one alternative for funding clean energy ventures is to issue “green” bonds, which were sold in China for $15.7 billion in the first quarter. According to the survey, the amount was almost four times what it was a year before.
Foreign investment organisations, such as the World Bank-affiliated International Finance Center, have also been more active. Wastewater treatment and solar power are two of the project proposals listed on the IFC’s website for China. According to Randall Riopelle, acting regional director for East Asia and the Pacific and country manager for China for IFC, the scale of IFC financing in China has risen from $500 million per year 15 years ago, to $1 billion per year more recently, with roughly 60% attributable to environment.
