• By The Financial District


Chinese state-owned firms are starting to default on their debts. It's a problem that could ripple through the country's financial system, threatening to slam the brakes on the nation's economy and hobble the global recovery from the pandemic, Laura He reported for CNN Business.

State firms defaulted on a record 40 billion yuan ($6.1 billion) worth of bonds between January and October, according to Fitch Ratings. That's about as much as the last two years combined.

The problem has only gotten worse in recent weeks. A slew of major companies — including BMW's Chinese partner Brilliance Auto Group, top smartphone chip maker Tsinghua Unigroup, and Yongcheng Coal and Electricity — declared bankruptcy or defaulted on their loans last month, sending shock waves through the nation's debt market. Bond prices have plummeted and interest rates have spiked, and the turmoil has even spilled over into the stock market, where shares of state-owned firms have been sinking.

It's alarming on a couple of fronts. First of all, the close relationships between these companies and local Chinese governments typically make them safe bets in times of trouble. If investors are worried that the state is no longer willing to support them, they suddenly become much riskier propositions. Second, the success of the state sector is critical to China's financial system. While such firms contribute less than a third of GDP, they account for more than half of the bank loans offered in China and some 90% of the country's corporate bonds, according to data from the People's Bank of China and Chinese brokerage firm Huachuang Securities. "The credibility of government guarantees has been the most important bulwark against [financial] crisis so far. Now we are seeing signs that this credibility is eroding," according to Logan Wright, director of China markets research at Rhodium Group.