Xi Jinping’s debt-relief recipe: how China’s biggest bond defaulter unloaded its liabilities

The massive steel plant in Dengshahe, which dominates a brutal, industrial landscape 50km northeast of downtown Dalian, is a source of pride and shame for the local economy. Ultimately owned by Liaoning’s provincial government, it produces the country’s best steel, with its high-quality products used in Chinese spaceships and rockets. But it is also the country’s biggest ever bond defaulter and a textbook example of President Xi Jinping’s approach to tackling China’s ballooning corporate debt. Dongbei Special Steel has failed to repay 10 batches of corporate bonds worth 7.1 billion yuan (US$1 billion) since March last year, leading to a year-long legal battle between the company and its 1,911 creditors, which include state banks, local lenders and small investors. In the past two years, as Dongbei Special Steel was talking with its creditors, China’s steelmaking landscape changed dramatically, with more than 100 million tonnes of obsolete or unwanted capacity shut down. Meanwhile, the benchmark Shanghai rebar price has almost doubled in the past 18 months, giving those steelmakers allowed to keep operating fat profits. According to official data, steelmakers’ profits were up 106.9 per cent year on year in the first eight months of this year. The Dengshahe steel plant, a key underlying asset of Dongbei Special Steel, made a gross profit of 320 million yuan in the first half of this year, ending years of operating losses, the official China News Service reported.