China’s leadership is promoting the concept of delinking debt from government obligations. Two recent examples are the high profile debt workouts for property developer Evergrande and asset management company Huarong, which have raised questions about the Chinese government’s support for the corporate sector. More broadly, the “implicit” obligation of the state is now increasingly under scrutiny.
The main motivation for this is
a. the inadequacy of state revenues to account for the existing implicit debt obligations, and
b. concern about a financial crisis as the result of a debt bubble.
There are areas, however, where some delinking can occur. This would be less likely to occur with high profile national companies like Evergrande and Huarong, and smaller corporates in local regions. Overall, though, China will have difficulty delinking due to the impact on economic growth and the potential financial and political instability that could be caused by a withdrawal of government support for certain companies and sectors.
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