China’s economy is a mess. Why aren’t firms going under?

The government’s desire to avoid bankruptcies is another drag on growth

A homebuyer visits an unfinished housing development in Dalian, China
Still standingimage: qilai shen/ the new york times/ eyevine

Evergrande is fighting for its life. On October 30th the property developer was granted its fifth, and probably final, stay of liquidation by a court in Hong Kong. Yet the situation on the mainland is a little more comfortable: the firm’s representatives have not even had to visit a courtroom. This is not unusual. Despite the many horrors visited upon China’s property sector, an industry publication reports that just 308 of the country’s 124,665 developers declared bankruptcy last year.

China’s ultra-low corporate bankruptcy rate—about a fifth of that found in America—might seem like unalloyed good news for officials in Beijing. That is until you consider the fact the country is experiencing a wave of corporate defaults, which includes half of the 50 largest property developers in 2020. With many unable to shed their bad debts through restructuring, businesses are struggling to reduce new borrowing and pay back outstanding loans. Policymakers, banks and firms all want to stave off formal bankruptcies in order to avoid a “Lehman moment”, or crisis-triggering event. The result is stifled productivity and deeper economic malaise.