What is the impact on Chinese corporates when there are defaults and mandatory replacement of management? Is it any different on state-owned enterprises (SOEs) in comparison to private-owned enterprises (POEs)
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Our report found that China had a smaller bond default rate compared with the U.S. and Europe. A number of insolvency cases in China did not lead to massive bond defaults because most of the borrowers had not tapped the bond market.
In terms of impacts, the two situations are very different on state-owned enterprises and private-owned enterprises in China because the cause of the events was different.
Most corporates continued to operate after bond defaults, which were largely the result of overcapacity and overexpansion. Only in a few default cases did the issuers go bankrupt. It is also worth noting that 32% of the defaulted issuers had participated in real estate projects, though those were not their core businesses. Instead of bankruptcies, companies have entered long discussions with bondholders. It is likely that SOEs have been waiting for government reforms and POEs have been negotiating with bondholders to restructure repayments.
For involuntary changes in management, all of the cases were related to corruption. The impact on SOE and POE’s was very different. SOE’s have been business “as usual” after other members replaced their management, but POEs could stop operating or run at a loss or be absorbed by the government because their owners disappeared or were detained, etc. The damage depends on the size and business nature of the private company.