Is China starting to let its state-owned enterprises default on its debt?
Tewoo may well be a landmark case that China is allowing state firms to fail
Tewoo Group Corp. is the Tianjin province's largest state-owned enterprise and it is on the verge of a major bond default.
On Friday, the firm proposed that investors either suffer a hefty amount of losses (up to 64%) or accept delayed repayment with sharply reduced coupons on $1.25 billion dollar bonds.
The latter proposal is a debt restructuring plan which will be one of the more unique cases for a Chinese state-owned enterprise and very likely increases the prospect of a default. For some background, the firm already needed help from a large Chinese state bank to pay a coupon on a $500 million bond last week.
Now, late or delayed repayments are not exactly extremely rare cases among Chinese state-owned enterprises but a high-profile dollar bond default such as that likely to be experienced by Tewoo will be the first such case since 1998.
Part of the bigger question now will be, is China going to be more selective in their support for state-owned enterprises from hereon or if Tewoo's case will be a one-off situation?
Let's do some digging into the backstory.
Although there were troubling signs already present with Tewoo's subsidiaries, things got worse when the bankruptcy of Bohai Steel Group Corp. hit in 2018. That triggered a systemic risk in Tianjian's financial market and resulted in liquidity issues for many local enterprises.
Add to the fact that China has been maintaining deleveraging efforts, it naturally makes it tough on high-leveraged companies (like Tewoo) to raise financing.
Now, Tianjin may be a bit of a special case as it is among the worst-performing economic and financial provinces in the country over the last few years. However, the fear now is that Tewoo may just be the tip of the iceberg.
And when you consider the fact that the overall economic health of China is starting to experience further deterioration, it only raises more systemic and contagion risks all over the country - not just in Tianjin.
This may not be a story that reverberates across markets all too much but it is something worth taking note of in case we start seeing other signs of potential worries developing within the Chinese economy in general.
In that lieu, just remember. Whenever China sneezes, the world catches a cold.