Record Defaults by Chinese Companies: Fake “Cash” & Fake Accounting

Painful moment of truth for banks & investors. “Uncertainty over the accuracy of the companies’ books and disclosure of pertinent information”: Fitch Ratings.

Defaults by Chinese companies on bonds they issued in China (“onshore” bonds, as opposed to “offshore” bonds) soared to a record in 2018, according to a report by Fitch Ratings:

  • 45 companies defaulted on 117 bonds, with a total principal amount of 110.5 billion yuan ($16.3 billion).
  • 39 of the issuers were non-state-owned enterprises, accounting for 90% of the principal amount in default.
  • 6 of the issuers were state-owned enterprises (SOEs), accounting for 10% of the principal amount.

The idea that the government would actually allow companies to default on their bank loans and bonds – rather than just bailing them out or pushing the state-owned banks to convert defaulted loans into equity and forget about them – is still a somewhat sobering concept.

Back in the good old days of 2014, there had been zero SOEs and only a handful of non-SOEs that were allowed to default. But the tolerance at government levels for corporate defaults, even by SOEs, has risen.

Fake credit ratings.

Nevertheless, the Chinese credit agencies are an exuberant bunch: 37.7% of the rated Chinese bond issuers at the end of 2018 were rated AA+ or higher, up from around 32.7% a year earlier. Bonds rated AA+ and higher account for 62.6% of the amount of corporate bonds outstanding, up from 59.5% a year ago.

There are practically no companies rated A+ or below, and no junk-rated companies, though there are some “unrated” bond issuers, according to Chinese credit rating agencies. The chart below shows that there is very little credit risk in Chinese onshore corporate bonds, that they’re all just pristine, and that just about none will default anytime soon, according to Chinese credit ratings agencies (chart from the report by Fitch Ratings):

The above chart is the opposite of US corporate credit ratings, where there are only two companies with AAA ratings — Microsoft and Johnson & Johnson — and a smallish number with AA ratings, while the vast majority of companies are rated BBB or below, all the way to single-C.

Even the ratings of US companies may be way too lenient, but it’s far more realistic than the fiction proffered by Chinese ratings outfits about their Chinese client companies. So investors beware! But the problems in China are far deeper than just ludicrously fake credit ratings.

Fake cash on financial statements.

Companies have big piles of cash listed on their balance sheet. But when push comes to shove, that cash doesn’t always exist. Fitch Ratings, in a separate report, named three of those companies that in recent months had “defaulted on moderate amounts relative to their reported cash holdings.”

They had substantially more unrestricted cash listed on their balance sheet just before the default than the amount of debt that they defaulted on. They should have easily been able to service their debt by using their “cash.” But no. Yet, their financial statements had been audited by Chinese audit firms. Fitch Ratings:

Three defaults in recent months have highlighted the risk of broader disclosure and governance problems among Chinese corporates, as well as the variable quality of local auditing.

Corporate defaults are usually driven by insufficient liquidity, but these companies’ stated cash balances cannot explain the non-payments.

Shandong SNTON Group Co. (Snton) reported a cash balance of 4 billion yuan at the end of June 2018. But on September 25, it was sued by the Hebei Bank Qingdao Branch for 139 million yuan drawn on two bank loans it had defaulted on. Despite the big-fat amount in cash listed on its balance sheet, it didn’t have the cash to service relatively small bank loans.

Even if half of its 4 billion yuan in cash was “restricted,” and could not be used to pay off an existing debt, as Fitch estimates, that still leaves 2 billion yuan to pay off a 139 million bank loan.

The company also raised 400 million yuan with a domestic bond offering in the first half of 2018, Fitch said, “suggesting normal access to the domestic funding market, despite generally tight credit conditions.”

Reward Science and Technology Industry Group Co. (Reward) reported 4.2 billion yuan in cash on its balance sheet at the end of September 2018. But on December 6, it defaulted on just 300 million yuan of commercial paper.

Of that 4.2 billion yuan in cash reported on its balance sheet, only a 548-million-yuan portion was restricted. The remaining 3.6 billion yuan should have been available to easily pay off 300 million yuan in commercial paper. But no.

Kangde Xin Composite Material Group Co. (KDX) reported a whopping 15 billion yuan in available cash at the end of September 2018, but on January 15, 2019, it defaulted on 1 billion yuan of commercial paper.

“Reward and KDX confirmed to Fitch shortly before their commercial paper due dates that their holdings of realisable cash were sufficient to meet obligations,” Fitch said. But that’s not how it turned out.

“These companies did not show other typical signs of distress prior to the defaults,” Fitch notes. In other words, big cash balances, no worries, and suddenly a default out of the blue, because the cash that was supposed to be there suddenly didn’t seem to be there:

The defaults call into question the actual availability and amounts of reported cash balances. The three companies reported their restricted cash balances in line with Chinese accounting standards – China GAAP – which mandate similar disclosures on cash encumbrances to international standards.

Fake Accounting

Fitch also notes:

Uncertainty over the accuracy of the companies’ books and disclosure of pertinent information is ultimately related to governance and accounting quality.

Governance issues – often challenging to uncover – have been a factor in Fitch’s ratings on Reward and KDX.

Reward’s ratings have been constrained by its low transparency as a private unlisted company with concentrated share ownership. The company changed auditor and re-issued its 2017 accounts due to disclosure and accounting problems flagged by the regulator.

KDX is listed on the Shenzhen Stock Exchange (SSE), but an apparent problem with its disclosure of concerted party arrangements at shareholder level prompted an SSE investigation, which hampered access to funding and prompted our downgrade in December.

Snton’s case demonstrates unpredictable financial management. It failed to repay domestic bank loans, but has continued to service onshore bonds.

Nevertheless, investor appetite remains high

Chinese companies were able to sell about $1.2 trillion of new bonds in 2018. Of those, 7.4 trillion yuan ($1.1 trillion) were onshore bonds, and $109 billion were “offshore” bonds, according to Fitch Ratings. But yields are gradually rising, and spreads to Chinese government bonds are widening, as investors become a tad more circumspect while they begin to grapple with the novel idea that the government would actually allow companies default.

Auto sales plunged in China over the past four months. What’s particularly disconcerting is the sharp deterioration at the end of the year in other markets, not just China. Each market has its own problems, but they’re sure coming together at an awkward moment. And this isn’t even a global recession yet... THE WOLF STREET REPORT

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  54 comments for “Record Defaults by Chinese Companies: Fake “Cash” & Fake Accounting

  1. Chris Garbor says:

    I’ve been doing business in China for over 20 years and it is a well known fact every public and private company in China has 2 sets of accounting books. One for the dopey customers and investors and one mostly accurate for their communist gov. The mostly real financial records get sent to their provincial commerce dept. and yes you can obtain a copy, but hardly anyone does. Chinese can often cheat naive investors and customers, but if they cheat their communist gov. then get sent to a labor camp or executed.

    100% of public and private Chinese companies are one massive Potemkin Village!

    • EH says:

      Really? I can obtain the copy? How?

    • Mike says:

      Amen. I hear that communist companies often operate like US banks and the Fed. They obtain funds from others (in China loans) via fraud or similar methods. They distribute them (aside from the portion absolutely necessary for operations, as banks here distribute Ill gotten gains quickly as dividends and keep minimal capital given their risky bets) and then they have huge debts to service with their earnings from real operations like manufacturing.

      They think that their connections to government (communist officials there) will result in bailouts from government (like the banks here could and can make fraudulent schemes and if they go sour (like when they got caught still holding the bad loans that they were selling as AAA rated to gullible investors in 2008)), they expect a government (here like in 2008 to 2012 hidden, effective, Fed bailout through ultra low, WAY below market interest rate loans to insolvent banks) bailout.

      Thus, they can commit fraud and bad decisions without worry and transfer all loot quickly (as dividends here) to their corrupt control group and share bribes to corrupt government officials. Really, their system is a mirror image or our corrupt system here.

      Maybe, so I can only assume that the defaulting companies will later receive aid or they did not have enough connections (i.e., did not bribe enough) and those unconnected crooks will suffer as sacrificial goats to supposedly “prove” that there is no corruption there. E.g., the way here the gov. (While not prosecuting ANY banksters for 2000 to 2008 frauds) made a show of sending a prominent Martha Stewart to jail for a few transactions and then carefully looked away from the other thousands and thousands of crooks actually making millions through insider trading—- FOR DECADES!

      • d says:

        “goats to supposedly “prove” that there is no corruption there. E.g., the way here the gov. (While not prosecuting ANY banksters for 2000 to 2008 frauds) made a show of sending a prominent Martha Stewart to jail for a few transactions and then carefully looked away from the other thousands and thousands of crooks actually making millions through insider trading—- FOR DECADES!”

        Martha went to jail, for LYING TO THE FEDS.

        Not for her trades on information supplied.

        If you wrote in china what you have posted here, you would have just signed your own internment/death warrant.

        The western system may not be the best, but it is way better than the CCP chinese on any day.

        If it were not, so many chinese who can, would not be trying to leave china, for western nations, that respect property wrights..

  2. Iamafan says:

    I think it’s best to just stay away from Chinese “muddy waters”. I’m not sure we can ever trust their accounting. Not sure what standards are actually used there. I remember Bogle say just invest in USA since a huge part of our companies’ sale is foreign anyway.

  3. Auld Kodjer says:

    No such thing as Chinese junk? Too funny.

    Then I guess there is nowhere for a Black Swan to land.

  4. rhodium says:

    The problem with fudging the numbers is that sooner or later it will catch up with you. China likes to pretend that everything is wonderful even when it isn’t, but that doesn’t change reality. If they told the truth their people won’t be as surprised when it all collapses, but as it stands they may actually get what they fear most.

    • alex in san jose AKA digital Detroit says:

      Er, *everyone* likes to pretend that everything is wonderful, even the US. Especially the US.

  5. Bernie Madoff says:

    I wonder how many of these bonds are sitting in those Chinese banks wealth management products that offer 7% returns?

  6. George says:


    Could it be that a great deal of this “cash” is being embezzled and has been making its way into the West coast real estate market?

  7. Gandalf says:

    Wolf, who buys thes Chinese bonds? Who held the bonds that defaulted?

    In China, the biggest economic winners and losers generally are always preapproved by the Party oligarchy. Somebody out of favor must have taken the hits

    Guanxi rules everything, get out of line, piss Important Officials off, and they will imprison or even execute you

  8. Chauncey Gardiner says:

    Fraudulent financial reports and credit ratings?… Hmm… Where have I heard this before?

    • HowNow says:

      Yes, Chauncey, “In a garden, things grow . . . but first, they must wither; trees have to lose their leaves in order to put forth new leaves, and to grow thicker and stronger and taller. ..” I think that explains it well.

    • Iamafan says:

      Where else could this come from?
      They are just copying. Everything.

      • Javert Chip says:


        Care to give a couple (presumably) US examples?

      • d says:

        In the past the chinese did “invent” or at least improve on, a few things. They copied Notes/Bonds from the pre bce Jewish’s money lenders.

        They invented “QE” AKA, “MONEY Printing”.

        A few seconds after they were the first nation on the planet top put printed paper money into general Population use.

        Soon after, it became illegal to pay accounts in gold or silver.

        If you look at the root cause of almost all of the huge number of chinese civil wars or revolts, after that period, you will find excessive money printing “QE”, at the root of almost all of them.

  9. kam says:

    Being less-than-candid is rooted in the culture.
    Sino-Forest, a delisted Toronto Stock Exchange company capitalized to the tune of C$4 billion in public stocks and debt, claiming to have vast timberlands in China, ended up not having ANY TIMBER AT ALL.
    Everything was smoke and mirrors.
    China is opaque for a reason, it is part of the strategy.

    • Prairies says:

      Sounds like Gold mining stocks. I want to pile on the Chinese hate but they really just perfected the capitalist financial system.

  10. Timothy J McLean says:

    I think anyone who reads Wolf Street regularly realizes the fraud that is Chinese accounting. However, most others want to believe the Chinese companies and their auditors are transparent. I loved Wolf’s analysis of Alibaba’s quarterly report about 6 months ago.

    It continues to amaze me how stupid the bulk of US investors are. They refuse to see the red flags. That said, I was stupid a few cycles back. I’m 52 now, so I have learned from many investment mistakes.

    • Javert Chip says:

      As I’ve said many times before, I estimate less than 10% of US investors can read financial statements. Transpose an “unqualified” investor into a fraudulent foreign nation and you have stupid squared.

      If fraud only rarely happens, you classify it a legal problem and move on. However the suspected rate at which it happens in China makes you suspect it’s systemic.

      • MCH says:

        That’s because fraud is systemic, mainly because people know that the government can take away their money at will. Why do you think an actress like Fan Bing Bing cooks up two sets of contracts, of course it’s to defraud the government, But from her way of looking at it, it is protection for herself, financially speaking of course.

      • WES says:

        Chip: You are being 10% too generous! Nobody can read US, ,never-mind Chinese , financial statements because they are all fiction!

        Back in the 1960s my Father said the only thing he ever looked at was to see if a company was up to date on their employee pension plan! If they were then the company had positive cash flow! Everything else was a work of fiction!

        Today you can not even tell what state a company’s pension plan is in because there is no company pension plan!

        • Jack says:

          WES, “Nobody can read US, ,never-mind Chinese , financial statements because they are all fiction!” Look on the bright side: maybe Pulitzer will start awarding prizes for these works of fiction ;-)

        • Gadi says:

          why read financial statements? The stock price is hardly correlated to them.

      • d says:

        Its not systemic.

        Its CCP orchestrated.

        You dont really think the CCP has FINALLY decided to allow western bankers to “Invest” in its banks.

        So that said western bankers can make back, and actually remove from china, their original investment, or any of the profits on it do you?

        Same in most other industries, remember GM is effectively today a chinese company, it pays on average 20 times more, annually, in tax to china, than it does the US.

  11. Dave B. says:

    Soon here too !

  12. Atu says:

    Was looking at how Chinese companies decide on cash holdings (when they do really exist I suppose), and reasons varied from maintaining an investment advantage, mitigating a rising rate environment and so forth. One study which paradoxically was on why they don’t hold cash, was fear of government expropriation, so with that in mind is

    “The governor of the city of Zhang Jia Gang has formulated a comprehensive plan to ensure strict separation between the operation of products production and the financial markets. The government will provide all necessary policies and operating capital guarantees to ensure a steady production rate and operation in the future,” a portion of the release reads.

    But as for the remainder of 2019, the industry should expect to see more from KDX on the American side.

    “We will present more in the US market, you will see many [more] things [from us] that will happen in 2019,”



    Which apart from having a kind of “lost in translation” which brings a smile, sort of speaks of government takeover of the parent company, which as far as I know was private.

    Maybe they fell out with their overlords and emptied the accounts in advance, or should that be the other way round?

  13. secant says:

    Seems to be a Catch-22 between China’s corporate debt, China’s Government debt, and China’s consumer debt. Being such, the tariff war could easily be the final snowflake that starts the global debt avalanche…

    “To understand why China’s slowdown is looking so ugly, you’ve got to look at what happened to Chinese consumers.”

  14. Al says:

    Yup, the Chinese “investment” community are showing themselves to be great imitators.
    Enron, GM, GE, “Asset backed securities”, “Mortgage backed securities”, Rating Agencies (for sale or rent), “Shale miracle”, ZIRP, NIRP, QE, “Modern Monetary Theory”, etc.

    The one area the Chinese seem to be failing to imitate is in government bailouts of failed stock market schemes.

  15. Jerry says:

    Chinese have long perfected the art of a “knock-off” products economy including western style financial fraud.

    Apple doesn’t fall far from the tree…

    Soon they will MCGA

  16. Keeper Hill says:

    China is not concerned with quality of anything. The more we can move production to countries that actually care about quality, including our own the better. The hopes that China would become like Japan was a fairytale. China is corrupt from top to bottom.

    • Paulo says:


      A few years ago I would have certainly agreed with you about Chinese products. However, QC seems to have really improved the last 10 years. I just left my HAM radio net using a Chinese Wouxun radio. There isn’t one US HAM radio manufacturer left these days, and the Chinese version seems as good as anything else available. Chinese tools are also improving and the warranties are as good as any other manufacturer. I used to buy only Canadian or USA made tools for most of my life and also looked for a Union Made sticker. I quit worrying about it when southern VW plant workers were afraid to join the UAW. Hell, if I could buy a basic Chinese-made truck instead of the techno wizard over-priced crap of today I would be standing in line. Calling Chinese products inferior is a red herring as so many components of North American assmbled products originate there.

      • alex in san jose AKA digital Detroit says:

        There is an American-made radio, it’s Elecraft. They started out selling kits, of which I’ve built a few, but lately they’ve been selling some pretty high-end radios that you can build or buy already built.

  17. MCH says:

    I think a big part of it is that you have to be careful about how you are doing business in China, right now, their business practices are largely what it was like in the late 19th century US.

    The rule of law only matters somewhat… the problem is of course, where do the money for those companies end up. I would guarantee that some of it made its way from the bank/investors to the owner to properties in Australia, Canada, etc. after a fashion, you can’t blame them. Fundamentally, property rights in China are weak, and people knows that all Pooh bear has to do is to wink and nod, and all of your money disappears. After all, why do you think Chinese people are busy parking their cash in overseas real estate where there is guaranteed property rights. They correctly figured if their house lose half its value, that’s still half they can get back.

    • backwardsevolution says:

      MCH – the Chinese who bought into Australian and Canadian real estate were the Chinese “elite”. They might have been trying to protect their money by buying hard assets, but they were also heavily involved in property speculation, fraud, and excessive money laundering.

      “It is estimated that they laundered over $1 billion (Canadian) per year through an underground banking network, involving legal and illegal casinos, money value transfer services and asset procurement,” stated the [G7] report.”

      A billion a year! Governments just looked the other way.

      • John says:

        backwardsevolution, a billion a year is what we know of–I’ve heard it to be much higher.

      • MCH says:


        If you think that the guys who are buying properties outside of the US are only elites, then I’d like to know your definition of the world elite. Property purchases outside of the world is booming because there are a good number of upper middle class that was trying to protect their money. Whether all of those money are “legitimate,” that’s TBD, I would bet that at least some of that money was not a function of fraud or underhandedness. But you have to understand that your average Chinese people aren’t stupid, the only question is whether or not they have sufficient means to carry out such financial protection.

        Also, those who are excessively rich, like the founders of BAT and all the other billionaires don’t bother with those methods, they have lawyers and accountants and other middle men that help them to transition their money legally.

      • Briny says:

        backwardsevolution, heck, anyone that desires a graduate level course in that sort of money laundering need only look at the UK, i.e. London.

  18. raxadian says:

    So the Chinese “Miracle Econony” dragon turned to be made like most dragons in Chinese festivals, out of cardboard. And then it started to rain…

  19. Keith says:

    WolfStreet rocks. The good content density on your site is astounding.

  20. Gian says:

    Why would we expect the governments of any country, including the US, to oversee these companies and protect investors, when their bread is being buttered by these corrupt companies?

  21. Wisdom Seeker says:

    From what I’ve been reading, a big part of the issue with the Chinese companies lack of genuine cash is the excessive use of stock pledges to borrow money, combined with massive ownership cross-linkage and conflicts of interest. Company A owns Company B, pledges shares of B to get cash C from lender D, and then A gets away with showing the cash on the books without needing to also show the corresponding debt. Then if shares of B drop, D margin-calls A to protect their loan, and now A goes into default or bankrupt. Basically all parties are leveraged beyond belief but no one (possibly including themselves) realizes just how risky the situation is. And of course when tough times come, the instinct is to ride it out as long as possible, so instead of deleveraging everyone leverages up some more.

    This sort of situation is a very fragile arrangement and was one of the big contributors to the 1929 crash and ensuing Depression in the US.

    • MC01 says:

      Ah yes, you are basically describing HNA group, with its highly convoluted holding structure (with a “charity” right in the middle and Cayman PO box companies thrown in the mix) and several board members suspected of using aliases to protect their true identities.
      But much more critically in January 2018 HNA Group admitted to $94 billion in debts and estimated debt servicing costs in 2018 at $5 billion. All in US dollars given the worldwide reach of the group. Assuming all the debt pays the same interest it means rates are over 20%… meaning either creditors know how shaky HNA really is or hinting at some serious financial shenanigans.

      HNA has been treated in extraordinary fashion by the Chinese government after running into serious financial troubles in 2017: it has neither been quietly bailed out nor broken up. But all foreign assets, often bought at crazy prices over the past decade, are being quietly put up for sale and the funds either repatriated or used to pay off foreign debts.
      What surprises me the most is not so much the HNA fire sale but the insane prices Western investors are paying for assets such as Manhattan real estate: HNA needs the cash right now so why not demand a big discount? These Western investors are the true greater fools.

      But in the meantime Airbus at Blagnac and Boeing at Renton are manufacturing airfract for airlines owned by HNA Group like there’s no tomorrow. Granted, an Airbus A350 or a Boeing Dreamliner are excellent collaterals but if those debt figures are anything to go by I wonder how many times those still unfinished airliners have already been pledged.

      • MCH says:

        indeed, more 787-8 and -9s. Woohooo.

        I believe there was more than one story of HNA group asking their own employees to “reinvest” in the company with their salaries. Yep, nothing fishy there.

        • MC01 says:

          I strongly suspect a lot of HNA employees have been jumping ship over the past couple of years: Hong Kong Airlines suffered a mass defection of executives late last year, including the CFO and two chairmen, one of whom was the former Hong Kong police chief.
          The company has gone as far as threatening to sue anybody questioning their financial stability, an unlikely move by a company which until not so long ago had apparently unlimited funds to burn through.

          In Summer 2018 Airbus had a row with HNA group over six A330’s due to about €1 billion in unpaid bills and (apparently/allegedly) only accepted HNA’s offer after political pressure was applied: given HNA Group affiliates (including Hainan Airlines and low-cost darling Lucky Air) are among those 45 companies which defaulted on bond issues in 2018 I predict a lot more of such shenanigans.

  22. B Wilds says:

    After years of rapid expansion China is enduring a slowing economy and because of this China recently made its first major monetary policy easing announcement of 2019 which was rapidly followed by another. The first move alone could pump 1.5 trillion yuan or the equivalent of 210 billion U.S. dollars of additional liquidity into the banking system to help arrest its deepening economic slowdown.

    China’s economy is hooked on new credit and government stimulus. China’s debt mania, by this I mean madness, craziness, and frenzy is now the largest ever experienced in the postwar emerging world. As the China story unfolds it is clear the scope for a debt meltdown in China remains immense.

  23. MCH says:


    It’s amazing, your article predates this SCMP report by a few days.

    Wonder if they read wolfstreet.

    • Wolf Richter says:

      Actually, yes. I know a business editor there, a Canadian. We’re in contact occasionally and even chat on the phone. And I know he reads WOLF STREET. He even posted a comment a while back.

Comments are closed.