ANNUAL REPORT

dkrause on DSKHT7XVN1PROD with USCC
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ment company, became the first SOE to default on bonds when it
missed a $13 million interest payment in September 2015. 26 Two
months later, state-owned China Shanshui Cement Group defaulted
on a $300 million loan. 27 In March 2016, Guangxi Nonferrous
Metals Group Co.—which had been receiving state aid since
2012—defaulted on $2.3 billion of its debt, and Dongbei Special
Steel, a state-owned steelmaker in Liaoning Province, defaulted on
its corporate debt for the seventh time on payments worth a total
of $715 million across all seven defaults. 28 According to Bloomberg,
the total number of Chinese companies with more debt than equity
jumped to 913 in 2015, a nearly 30 percent increase since 2007. 29
As a result, total bond defaults have skyrocketed, with 34 defaults
accounting for around $3 billion in China’s domestic bond market—
including both SOEs and private enterprises—in the first half of
2016, nearly double the number of defaults in all of 2015. 30 In September
2016, state-owned Guangxi Nonferrous Metals Group Co.
became the first company liquidated by Beijing after it could not
reach an agreement with investors to bail out the company following
its March 2016 default. 31 China’s central bank governor,
Zhou Xiaochuan, has expressed concern over the highly leveraged
state of the economy, encouraging the development of ‘‘robust capital
markets’’ to reduce China’s reliance on debt and increase equity
financing. 32
Notwithstanding rising debt levels, Chinese companies are increasingly
acquiring foreign companies in strategic sectors to earn
government subsidies and other incentives. 33 SOEs in different sectors
have varying reasons for looking abroad: energy and resources
firms aim to stabilize their domestic supply of resources, avoid
price volatility, and learn about new resource extraction methods;
technology firms aim to acquire new technology; and manufacturing
firms aim to be closer to their target markets and mitigate
concerns over protectionism. 34 For example, China National Chemical
Corporation’s (ChemChina) $43 billion takeover of Swiss seed
giant Syngenta AG likely seeks to boost China’s farm productivity.
35 The Syngenta deal may also allow China to monopolize the
development of genetically modified crops. In February 2016, China’s
Tianjin Tianhai Investment Co. made a bid for the U.S. electronics
firm Ingram Micro, Inc. to boost China’s domestic technology
capabilities and reduce imports of high-tech products (for a
list of Chinese bids and acquisitions of U.S. companies, see Chapter
1, Section 1, ‘‘Year in Review: Economics and Trade’’). 36 By acquiring
businesses in line with the Chinese government’s industrial
policy,* SOEs earn support from Beijing, including backing from
state banks and capital markets. 37 These deals ultimately increase
SOE debt in China, with companies sometimes relying on extremely
risky loans from state banks to finance the deals. 38 China
has also announced new policies aimed at reducing banks’ NPL ratios,
including a securitization program and debt-for-equity swaps
(for more on government efforts to address China’s debt problem,
* China’s industrial policy seeks to enhance indigenous innovation, reduce overcapacity, and
develop the country’s high-technology and environmental industries, including biotechnology,
high-end manufacturing equipment, and new-generation information technology. U.S.-China
Economic and Security Review Commission, Chapter 1, Section 3, ‘‘China’s State-Led Market
Reform and Competitiveness Agenda,’’ in 2015 Annual Report to Congress, November 2015, 158–
162.
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