When the chairman of China’s Dongbei Special Steel Group hanged himself last year, it was clear that something at the firm was going horribly wrong. Next, the company defaulted on nine separate corporate bonds, telling creditors that it lacked the money to pay its bills. Dongbei declared bankruptcy last October.
In the fall of 2015, before Dongbei’s slide into insolvency, Chinese President Xi Jinping had declared that Beijing would soon implement “supply-side structural reforms” to cut debt and overcapacity in Chinese industry. With its record of unprofitability, Dongbei might seem to be a perfect candidate for the policy.
But Dongbei isn’t being shut down. Nor is it being restructured. Courts in the troubled industrial province of Liaoning, where Dongbei is based, have yet again postponed discussion of the firm’s restructuring plan. Rather than cutting output, the province’s steel production hit a record in April, up 4.6% from last year. And Dongbei still owes $6.4 billion to Chinese banks, most of which will probably never get repaid.
China has long relied on debt to fuel growth. The country’s debt burden expanded over 2.5 times faster than its economy in 2016, and its ratio of corporate debt to GDP is one of the highest ever seen in a big economy.
Mr. Xi has repeatedly said that China intends to cast off this model of development. Earlier this year, he declared that “financial security”—including debt sustainability—was key to China’s “national security.” But change has been slow, and as long as the government provides cheap loans to spendthrift provinces and bankrupt businesses, the risk of a debt-driven financial crisis will grow.