Commentary
Chinese authorities’ Nov. 4 rescue of Zhuhai Huafa Group shows how implicit state guarantees let government-owned companies pile up debt even as profits barely grow.
Investors lend on the assumption that the Chinese Communist Party (CCP) will prevent a default. When a company can no longer meet its obligations, the state spreads the cost among trust investors, banks, and other state companies rather than recognizing the losses.
In late October, reports of missed payments on Huafa-linked trust products and requests to extend bank loans triggered China’s worst credit selloff in two years. Huafa, the largest company owned by Zhuhai, a city in Guangdong Province, carries 404.7 billion yuan (about $61 billion) in interest-bearing debt.
On Nov. 4, Zou Hui, director of Zhuhai’s state assets commission, said the city had provided Huafa with more than 40 billion yuan ($6 billion) and would coordinate another 70 billion yuan (about $10.5 billion) in financing.
Huafa borrowed heavily to expand beyond Zhuhai, but its profits failed to keep pace. After becoming chairman in 2012, Li Guangning pushed the group into major cities and six business segments. Between 2019 and 2023, Huafa more than doubled its assets to 729.6 billion yuan (about $109 billion) and more than doubled its revenue to 179.5 billion yuan (about $27 billion).
Yet net profit attributable to parent-company shareholders rose only 36 percent, from about 1.3 billion yuan to 1.77 billion yuan (about $195 million to $265 million). By 2023, Huafa earned only about 1 yuan of attributable profit for every 100 yuan in sales—a margin too thin to support more than 400 billion yuan in debt.
In a market economy, a company whose assets and revenue double while profits increase by only a fraction of that amount would struggle to persuade private, profit-driven banks to finance further expansion. In China, however, state-owned companies can often secure credit despite low returns because lenders expect government support.
China Lianhe Credit Rating gives Huafa its highest rating, “AAA”. Chinese domestic ratings are so inflated that, as of March 2026, 27 percent of the country’s more than 6,000 bond issuers held AAA ratings. China Vanke still carried a domestic AAA rating late last year when it asked bondholders to delay repayment.
Fitch, which uses an international scale, rates Huafa “BBB,” eight steps below AAA and near the bottom of investment grade, but still considered safe enough for conservative investors such as pension funds and insurers. Even that rating rests on Fitch’s expectation that “extraordinary government support is extremely likely.”
When a rating reflects an expected bailout rather than the business, it no longer measures whether the borrower can repay from its own earnings. Capital keeps flowing into projects that cannot pay for themselves. This helps explain China’s highways and high-speed rail lines to nowhere, ghost cities, and heavily indebted local governments.
Huafa lost 16.9 billion yuan (about $2.5 billion) in 2025. By the end of June 2026, it had just 50.1 billion yuan (about $7.5 billion) in unrestricted cash against 154.1 billion yuan (about $23 billion) in debt due within a year. Much of the rescue involves other state companies buying Huafa’s assets.
The city’s task force is ensuring that Huafa pays its publicly traded bonds in full and on time while extending repayment periods and cutting interest rates on its trust products and bank loans, leaving trust investors and banks to absorb the cost.
Zhuhai used Huafa to develop and finance infrastructure and social housing, a role local governments across China assign to companies known as local government financing vehicles (LGFVs). China’s 1994 Budget Law prohibited most local governments from borrowing, so they created these state-owned companies to borrow on their behalf for roads, industrial parks, and housing.
Many of these projects cannot earn enough to repay their loans. The International Monetary Fund (IMF) found that many LGFVs have structurally weak debt-servicing capacity and estimated that 39 to 46 percent of their debt would need restructuring.
Lenders keep financing these companies because they assume the state will prevent defaults. State-owned enterprises and LGFVs account for more than 90 percent of recent new corporate bond issuance in China, and banks hold about 75 percent of LGFV debt.
In November 2024, Beijing approved a plan to convert 10 trillion yuan (about $1.5 trillion) in hidden local debt into official local government bonds. IMF staff concluded that the plan does not materially address borrowers’ debt-servicing capacity.
Beijing also reported that by the end of 2025, more than 82 percent of LGFVs had been removed from its list of local financing vehicles and that their operating debt had fallen more than 74 percent. Many exited through renaming, mergers, and debt swaps.
The resulting companies shed the LGFV classification but retained their debts without developing sustainable profits to repay them. Despite the reshuffling, the IMF estimated that LGFV debt rose from 64.4 trillion yuan at the end of 2023 to 71.4 trillion yuan (about $10.7 trillion) by the end of 2025.
China’s banks are absorbing losses at an accelerating pace. They wrote off 1.27 trillion yuan (about $190 billion) in loans in the first nine months of 2026, up 23.3 percent from a year earlier, helping keep the official bad-loan ratio low.
Industrial and Commercial Bank of China, the country’s largest lender, set aside 81.9 billion yuan (about $12.3 billion) for write-offs in the first half alone, its largest effort in years.
China Lianhe Credit Rating reported that some banks still hold large balances of extended loans and new loans used to repay old ones, while their loan classifications understate actual risk. China’s total debt reached 308.2 percent of economic output at the end of June 2026.
Zhuhai’s land-sale revenue fell 94 percent in five years, while Huafa’s debt reached 8.2 times the city’s annual budget revenue. The guarantee that keeps China’s state-owned companies borrowing is only as strong as the local governments behind it. Those governments no longer have the revenue to honor it. Yet the loans keep flowing.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
