After several state-owned enterprises of the Chinese Communist Party (CCP) defaulted on their business obligations, the CCP got into financial difficulties and was forced to seek financing.
This was followed by an accelerated sale of bonds that were losing value in the market, also affecting the financial market itself and encouraging “shadow banking” in the urgent search for liquidity.
One of the 68 companies authorized to carry out trust activities in China and one of the largest “shadow banks” on the continent, Huaxin Trust Co. requires $1 billion to overcome its difficulties.
"Wave of financial distress flooding #China’s corp sector is spilling into shadow banking. Huaxin Trust, 1 of 68 cos licensed to conduct trust biz, is trying to raise 6.8B as it faces a growing liquidity squeeze that’s already forced it to skip repaymts"https://t.co/AREmyMZ1J6
— China Beige Book (@ChinaBeigeBook) November 20, 2020
However, one of the conditions imposed by Huaxin Trust Co. on its potential investors is that they support the financing of the company, which would make them lose interest.
Due to the lack of liquidity, it stopped meeting the repayments of dozens of investment products and loans in recent months.
Huaxin Trust was under suspicion of mishandling the money entrusted to the company, which it was quick to deny.
Another company in trouble is Sichuan Trust Co., which has been unable to return more than $3 billion to investors.
Similarly, Anxin Trust Co. which is listed on the Shanghai stock exchange collapsed last year when it was discovered that it was short $7.6 billion.
Recently, the default on Yongcheng Coal bonds has raised further concerns about whether local governments will be able to rescue the state-owned companies they run.
Yongcheng Coal & Electricity Holding Group, a mining operator owned by the Henan Province, defaulted on a $152.2 million payment earlier this month, according to the South China Morning Post on Nov. 23.
The bond default by state-owned companies has also highlighted China’s debt problem, which has grown this year, setting off alarm bells in the financial sector.
The Institute of International Finance estimated last week that China’s total domestic debt, including financial loans, reached the exorbitant percentage of 335 percent of GDP in the third quarter of 2020.
The country’s overall debt grew faster this year because of the disastrous impact of the CCP (Chinese Communist Party) Virus.
The CCP extended the limit of local government debt in an attempt to improve its economy.
For former Finance Minister Lou Jiwei, the economic recovery could be accompanied by a debt crisis that is in the making.
“Once the economy recovers, too much liquidity needs to be returned,” Lou said at a summit in Beijing last week, according to the South China Morning Post.
He added, “There is also the risk of debt collapse. We should resolutely reduce leverage, especially within financial institutions.”
The Trump administration imposed severe sanctions on many companies linked to the CCP, and given that the regime is considered a serious threat to the United States, and to the world in general, the outlook is not very positive for its stability.
Moreover, it now appears to be involved in serious interference with the U.S. electoral process.