There’s an old saying in investing, which, paraphrased, works out to “you only find out who is swimming naked when the tide goes out.”
In general, this means those who are exposed to shifting fortunes – economic pressures, financial pressures, you name it – are exposed when good or easy times go by the wayside.
So may be the case amid China’s economic slowdown, where at least some companies are showing the impact of having taken on heavy debt loads when times were relatively flush, and when it was relatively easier to service that debt.
As noted in The Wall Street Journal, several anecdotes illustrate how the private sector is grappling with excessive debt, as some companies – even marquee names – are being pushed into bankruptcy.
In one example, the world’s largest costume jeweler, Neoglory Holdings Group Co., has been described by a bankruptcy court as being “unable to repay a debt, has insufficient assets for repaying all its debts and is apparently insolvent” with $6.8 billion in loans.
Companies took on debt to expand, and perhaps expanded a bit recklessly into new markets that proved to be crowded, reported the Journal. Amid that backdrop, China’s debt load quadrupled over the span of a decade, and Chinese corporate debt stands at $1.7 trillion outstanding.
Though much of that debt is shouldered by government-run companies, private sector firms are showing signs of strain as creditors call in loans. That comes as the government two years ago started to rein in lending activity from banks and other lenders.
At the same time, the economy at large, which grew by 10.6 percent in 2010, may now have trouble hitting a 6 percent pace. Many companies have been dependent on export and construction activity, which have both been hampered, and geopolitics and a lingering trade war have had an impact. And larger firms, which may have once had the financial firepower to reinvest significantly in various projects that would boost economic growth, have been hamstrung by their debt loads.
The ripple effect on lenders has been palpable, too, as the government took over Baoshang Bank, a smaller lender, marking the first takeover in decades. Bankruptcy rates topped 18,000 firms last year, doubling the pace of the previous year. Defaults on bonds, reported the Journal, touched 125 last year, a rate that was five times higher than had been seen three years earlier.
Per that aforementioned investing maxim, it looks like the tide may indeed be going out.