A defining moment
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The stock market will come under severe pressure today following Beijing's decision to make the Guangdong International Trust and Investment Corporation (Gitic) file for bankruptcy. But few outside investors can be particularly surprised over the decision.
The mainland Government had little choice of action, given the state of the company's assets and the size of its debts. With the whole economy under stress, a government bailout was never really a possibility. But the hope persisted that Beijing would at least allow the repayment of principal on registered debts.
Letting the company go under is a defining moment in the relationship between foreign investors and the Chinese Government. Investors are now asking whether there are other Itics about to go the way of the Guangdong venture. There is concern that the Fujian Itic, due to make a payment on its yankee bond early next month, may be in a worse state than Gitic.
Grim as the news may be for foreign investors who rushed headlong into the window companies, abandoning many of the basic rules of financial prudence, the outlook for the mainland is worse.
It will be difficult to attract funding for any projects at a time when the economy is at a low ebb, and with the creaking state-run industries haemorrhaging money that has poured into China in recent years. Credit has been drying up ever since Gitic's problems came to light, but now that the extent of mismanagement, and the lack of supervisory restraints is revealed in its full horror, investors will demand far stronger assurances about their funding before they can be coaxed into lending.
Banks which loaned money without checking where it was being directed can only reflect that they bear some of the responsibility for their present plight. But that is no comfort to lenders who stand to lose out on registered debt. The mainland authorities will suffer because of their laxity in giving so much rein to unsophisticated enterprises which began to believe in their own invincibility.
The full extent of the damage is unknown, but many creditors will never see any return for their money.
All they will get is a new insight into the labyrinth of the banking system and conduct of business on the mainland, but at a very heavy cost.