Xi Jinping’s debt-relief recipe: how China’s biggest bond defaulter unloaded its liabilities

The massive steel plant in Dengshahe, which dominates a brutal, industrial landscape 50km northeast of downtown Dalian, is a source of pride and shame for the local economy.

Ultimately owned by Liaoning’s provincial government, it produces the country’s best steel, with its high-quality products used in Chinese spaceships and rockets. But it is also the country’s biggest ever bond defaulter and a textbook example of President Xi Jinping’s approach to tackling China’s ballooning corporate debt.

Dongbei Special Steel has failed to repay 10 batches of corporate bonds worth 7.1 billion yuan (US$1 billion) since March last year, leading to a year-long legal battle between the company and its 1,911 creditors, which include state banks, local lenders and small investors.

It chairman hanged himself just days before the first default, when it failed to repay creditors 852 million yuan in one-year notes and interest.

But the dust settled two months ago when a local court ordered a “bankruptcy restructuring” plan in which the creditors lost as much as 78 per cent of their money, and were given the option of having the remainder turned into equity. That allowed Dongbei Special Steel to offload billions in assets and, blessed by a windfall from a steel price rally, the steelmaker is now profitable and busy.