China’s Nov. 4 rescue of Zhuhai Huafa Group shows how implicit state guarantees let government‑owned firms pile up debt while profits stagnate.
China’s State Rescue Fuels Debt Expansion
Investors assume the Communist Party will block a default; when repayment falters, the state spreads losses across trust investors, banks and other SOEs rather than recognizing the shortfall.
Missed payments on Huafa‑linked trust products in late October triggered China’s worst credit selloff in two years. Huafa carries 404.7 billion yuan ($61 billion) in interest‑bearing debt.
Zou Hui, director of Zhuhai’s state assets commission, said the city injected more than 40 billion yuan ($6 billion) and will coordinate an additional 70 billion yuan ($10.5 billion) in financing.
Huafa’s assets more than doubled to 729.6 billion yuan ($109 billion) and revenue rose to 179.5 billion yuan ($27 billion) from 2019‑2023, yet net profit grew only 36 percent, yielding a margin of roughly 1 yuan profit per 100 yuan of sales—too thin to service 400 billion yuan of debt.
Rating Gaps and Market Perception
China Lianhe Credit Rating awards Huafa an AAA rating, even though 27 percent of China’s 6,000 bond issuers held AAA as of March 2026, a level inflated by state expectations.
Fitch gives Huafa a BBB rating, eight steps below AAA, deeming it safe for conservative investors but reliant on the expectation of “extraordinary government support.”
When ratings reflect anticipated bailouts rather than actual repayment capacity, capital flows into unprofitable projects, creating white‑elephant highways, ghost cities and over‑leveraged local governments.
LGFV Debt and Systemic Risk
Huafa’s rescue mirrors local government financing vehicles (LGFVs) that borrow on behalf of municipalities barred from direct borrowing under the 1994 Budget Law.
The IMF estimates 39‑46 percent of LGFV debt requires restructuring, yet lenders continue to fund them on the assumption of state backing.
Beijing’s November 2024 plan to convert 10 trillion yuan ($1.5 trillion) of hidden local debt into official bonds does not improve debt‑servicing capacity, according to the IMF.
By end‑2025, more than 82 percent of LGFVs were removed from official lists, but debt persisted after renaming, mergers and swaps, pushing total LGFV debt to 71.4 trillion yuan ($10.7 trillion) by 2025.
Bank Losses and Macro Outlook
Chinese banks wrote off 1.27 trillion yuan ($190 billion) in loans in the first nine months of 2026, a 23.3 percent increase, keeping official bad‑loan ratios low.
Industrial and Commercial Bank of China set aside 81.9 billion yuan ($12.3 billion) for write‑offs in the first half, its largest effort in years.
China’s total debt reached 308.2 percent of GDP by June 2026, while Zhuhai’s land‑sale revenue fell 94 percent, leaving Huafa’s debt at 8.2 times the city’s annual budget.
State guarantees rest on local governments that no longer generate sufficient revenue, yet loans continue to flow.
Views expressed are those of the author and not necessarily those of The Epoch Times.
