Workers cut up coal carts in December 2019 at a coal mine in Mentougou, west of Beijing, where many mines were closed as China sought to cut carbon emissions.
Greg Baker | AFP | Getty Images
BEIJING – China’s bond defaults are increasingly concentrated in part of the country whose growth could be under increased pressure from tough new carbon emissions restrictions, according to an analysis by Nomura.
Fifteen regions in the northern half of China, including Beijing and Inner Mongolia, accounted for 63.4% of government bond defaults last year, up from 51.5% in 2019, Nomura said in an April 27 report .
This is the latest sign of growing economic inequality within the country, where GDP and population growth in the north are already lagging behind those in the south. China’s promise to cut CO2 emissions by 2030 now means that the northern region’s economy has production restrictions.
“The new environmental campaign has the potential to hit northern China – where a large part of steel, aluminum and other raw materials are manufactured and processed – particularly hard,” wrote the Nomura analysts.
“Since most of these steel and aluminum mills are located in lower tier (less developed) cities, these cities’ public finances are likely to be disproportionately affected, increasing the risk of credit default,” they said.
There are many state-owned companies and heavy industries in northern China. This meant the region was disproportionately affected from the late 1980s when China began Reducing the role of state-owned companies in the economyAs a result, many workers lose their jobs.
Meanwhile, southern China has more export centers such as Guangdong and Jiangsu provinces. The region counts Shanghai and Shenzhen among its major cities and was an early beneficiary of China’s plan to allow more foreign and privately owned companies to enter the relatively closed domestic market.
According to the Nomura analysts, historical factors and overcapacities built up after the financial crisis of 2008 contributed to a further weakness in the north. They estimate that northern China contributed only 35.2% of the national nominal GDP last year, while GDP per capita was only about three-quarters of southern China’s GDP.
The north is also more dependent on debt. The share of outstanding corporate bonds in GDP in northern China rose to 52% in 2020 compared to 30% in southern China, Nomura said.
“The north-south divide could become an important factor in credit differentiation in the coming years,” the report said. “Indeed, we have already seen some deterioration in the northern provinces’ ability to raise funding from the bond markets.”
The north accounted for 10% of national corporate bond issues in the first quarter, compared to 42% for the whole of last year, analysts said.
Pressure on the north is mounting as defaults in China rise overall, particularly among state-owned companies that investors previously believed had implicit government support.
While defaults are still quite low relative to the overall market, the trend will push investors to differentiate between different issuers of bonds, said Ivan Chung, head of Moody’s credit research and analysis team in China.
According to Chung, issuers canceled bonds last month for two different reasons. One is that the issuer is too weak to arouse enough appetite for investors, he said. The other is that despite good quality, market sentiment has driven the cost of the bonds up and made them too expensive.
Investors worried about this in April, amid some signs of growing concern The state bad debt manager Huarong would not be able to make his payments.
Separately, 24 companies backed by the Henan provincial government plan to set up a 30 billion yuan ($ 4.6 billion) fund to help local businesses deal with debt risks. The Chinese financial media website Caixin reportedciting a government official. Henan is part of Nomura’s name “Northern China”.
Financing a renewable energy relocation
What China looks like Balance between growth and reduction in CO2 emissions. Less pressure on high carbon projects may not be enough. Privately owned renewable energy companies may have difficulty obtaining funding from a system in which the largest banks are state-owned and prefer loans to similarly state-backed companies.
One way to fund renewable energy projects can be Issued “green” bonds worth $ 15.7 billion was sold in China in the first quarter, according to Reuters, citing data from Refinitiv. That volume was almost four times what it was a year ago, the report said.
Foreign investment organizations such as the International Finance Center affiliated with the World Bank have also become increasingly involved. Some of the project plans IFC lists on its website for China include wastewater treatment and solar energy.
The size of IFC funding in China has grown from $ 500 million a year 15 years ago to $ 1 billion a year more recently, with about 60 percent climate related, said Randall Riopelle, acting regional director for East Asia and the Pacific and Country Manager for China for IFC.