Debt-ridden SOEs can expect less support from Beijing, recent cases suggest

After a long wait for a solution to surging defaults by Chinese state-owned enterprises (SOEs), some recent cases have started to shed light on the government’s likely approach.

To the disappointment of those believing that Beijing would continue its long-held policy of stepping in to rescue debt-ridden companies on the brink of bankruptcy, it appears to be switching to a more market-oriented approach.

Dongbei Special Steel Group, a state-owned steel maker in China’s northeastern Liaoning province, has been at the heart of the debt market’s troubles this year, having defaulted on nine separate bonds since March. Its initial missed payment was a contributor to a widespread selloff in corporate debt in the mainland.

Dongbei’s creditors have been stuck in round after round of negotiations with the company, and still there is no clear prospect of a solution on the table. The matter has raised questions about whether the government would accept bankruptcy as an option, given the significant impact that would have on local employment and, possibly, social stability.

On September 30, Fushun Special Steel, a subsidiary of Dongbei, said in a statement that a court is reviewing an application from creditors for a bankruptcy restructuring of its parent company. Before that, the local government had confirmed that Dongbei would enter bankruptcy proceedings, according to media reports that cited a summary of a creditors’ meeting.

Also last month came the bankruptcy of state-owned Guangxi Nonferrous Metals Group, the country’s first interbank bond issuer to fail.