Across The Border | China’s Bohai Steel seen as trial case for debt restructuring at state-owned enterprises

The debt restructuring of a leading Chinese steel company has caught the attention of the market in what some analysts see as a landmark case for reform of the troubled sector.

Bohai Steel, a steelmaker based in northeast China Tianjin is struggling with debt of 192 billion yuan (HK$228.96 billion).

Analysts believe the lack of a government bailout may signal China’s desire to develop a test case for other loss-making state-owned enterprises and local governments to follow.

“The lack of government support for Bohai Steel’s creditors could lead to greater credit risk pricing for weak companies operating in industries with excess capacity,” Standard & Poor’s credit analyst Christopher Lee said in a report.

The Chinese government has promised various measures to reduce the government’s role in the economy, including restructuring state-owned industries. But the heavy debt load of state-owned companies may make reform difficult. The steel, coal, cement and non-ferrous metals sectors carry combined debt of US$1.5 trillion.

Bond defaults and even bankruptcy are relatively rare in China, especially for state firms, but the government is trying to highlight the risks of rising debt and set up mechanisms to mitigate those risks.

Tianjin government, which owns Bohai Steel, will coordinate with creditors, which could involve deferment of interest payments and extension of debt repayments, to facilitate plant closures and asset restructuring. The city government’s asset management company may also lend a hand by acquiring delinquent loans.