Bankruptcy of China Bohai Steel Threatens Chain Reaction in Industry, Finance

Move puts 105 creditors in northern port city of Tianjin at risk
October 11, 2018 Updated: October 11, 2018

With nearly $28 billion in unpaid debts, China Bohai Steel has begun to file for bankruptcy, in a process that will affect 48 factories and 105 creditors in Tianjin, a port city of 15 million people located near Beijing.

Bohai Steel’s bankruptcy process, which began in September, could have serious repercussions for the Tianjin financial sector, as it owes debts to seven major regional banks, including the Beijing Bank, Tianjin Bank, Tianjin Binhai Rural Commercial Bank, China Construction Bank, Shanghai Pudong Development Bank, Industrial Bank, and Bank of China.

The Beijing Bank, Tianjin Bank, and Tianjin Binhai Rural Commercial Bank each own more than 10 billion yuan (about $1.5 billion) of Bohai Steel’s debt, while each of the other four banks owns 6 billion yuan (about $870 million) to 10 billion yuan of debt.

Other major creditors include the Northern Trusdebtt, Tianjin Trust, and National Trust, altogether owning more than 2 billion yuan (about $300 million) in Bohai Steel’s debt. The steel giant also owes Jizhong Energy 1.2 billion yuan (about $174 million), and Jibin Development 620 million yuan (about $90 million).

Bohai Steel was founded in July 2010 by the Tianjin government through the merger of four major local state-owned steel companies—Tianjin Steel Pipe Group, Tianjin Iron & Steel Group, Tianjin Tiantie Metallurgy Group, and Tianjin Metallurgy Group.

At the founding ceremony, Bohai Steel received a 100 billion yuan credit limit from state-owned banks. Yang Dongliang, Tianjin’s deputy mayor at the time, expressed official thanks to the banks. In 2015, Yang was subject to investigation by the authorities. In 2017, he was sentenced to 15 years and made to pay a 2 million yuan fine for taking bribes and plundering the public treasury.

Bohai Steel, the biggest state-owned steel company in Tianjin, was ranked 304th in the Fortune Global 500 in 2015 and 327th in 2014. With robust support from the Tianjin government, Bohai Steel received credit from different financial entities, but the company ran into operational difficulties from day one. By the end of 2015, Bohai Steel owed 200 billion yuan to its creditors.

In January 2016, the Tianjin authorities organized a meeting of financial entities, where the latter were asked to commit long-term and constant support to the steel industry. The meeting caused alarm among executives, and some entities withdrew credit from Bohai Steel. In an effort to save the company, the Tianjin government tried to swap Bohai Steel’s debt for stock, but that effort failed as well.

China’s steel industry, the largest in the world, is a critical part of the Chinese regime’s state-planned economy and one of the main drivers behind the mass construction of infrastructure and housing throughout the country. Since 2012, however, the steel industry has been suffering heavy losses as demand cools.

In April 2016, Xu Zhongbo, a professor of metallurgy at the University of Science and Technology in Beijing, told the New York Times that the situation of Bohai Steel as an example of how “the banks are now hijacked by the company.”

Xu said that when it’s too difficult to find an economic solution to revitalize a state-run company, it falls to the government to use its political power. But Bohai Steel evidently hasn’t been afforded this treatment.

Bohai Steel is the third-largest state-owned steel enterprises to go bankrupt in the last two years. Dongbei Special Steel filed for bankruptcy in 2016 after Chairman Yang Hua committed suicide in March 2016. Chongqing Iron and Steel went bankrupt in July 2017.

Tianjin is a coastal metropolis in northern China and one of four municipalities that are administered at the provincial level by the Chinese regime.