Donald Trump’s trade war has gone some way to subduing China’s economy this year. A far greater restraining influence has been homegrown. A financing squeeze orchestrated by Beijing to rein in its shadow finance industry and frothy property market has clobbered the private sector.
The implications both for China and a slowing global economy are crucial. Privately owned companies contributed more than 60 per cent of GDP growth last year, employed some 340m people and drove much of the country’s technological innovation. For all their importance and dynamism, however, private companies have always been a poor relation to the state-owned enterprises that enjoy close political links to China’s Communist party hierarchy. Thus when the liquidity squeeze is applied, the private sector struggles to slake its thirst.
Nowhere is this clearer than in China’s $13tn domestic bond market, a key source of funding for the most heavily-indebted corporate sector in the world. While overall bond issuance this year has grown, the share of this financing taken by private enterprises has dropped precipitously. Deprived of official access to issue new bonds they are defaulting in droves. A full 12 per cent by value of bonds issued by private Chinese companies have defaulted between 2014 and now, compared with 0.2 per cent for state-owned companies, said S&P Global Ratings.
