📚 Acrostics Anatomy: China’s Double Helix
China’s property and LGFV sectors are intertwined, complicating official efforts to unclog the bad debt in the system.
📒 Quick Take: China’s Unequal Property Pain (2 May 2025)
💼 Brief Take: China’s Debt Clearance (12 September 2025)
💼 Brief Take: The SOE Circles (17 October 2025)
💼 Brief Take: China’s LGFV Pruning (25 October 2025)
📒 Quick Take: Asian Sovereigns’ Tug of War (6 November 2025)
👣 Asia’s Restructuring Milestones Part 1: China’s Double Helix (16 November 2025)
📒 Quick Take: China’s Unequal Property Pain
2 May 2025
Chinese developers are starting to drop the pretend-and-extend exercise as the property sector won’t recover anytime soon.
It’s tough for foreign creditors to demand fairness when the information, assets and relationships are concentrated onshore.
Chinese developers are starting to drop the pretend-and-extend exercise as it’s becoming clear to everyone that the property sector won’t recover anytime soon.
The pain will have to be felt now instead of kicking it down the road, so the source of contention in the latest round of restructuring will likely be the distribution of pain.
Since mid-2024, Chinese companies generally received less money from banks, bonds and shadow financing, according to a report by S&P Global Ratings. Higher-rated firms dominated issuances, but lower-rated firms had mostly negative net issuances, particularly for private enterprises and weaker local government financing vehicles (LGFVs).
Offshore maturities will peak at USD 104 billion in 2025, before dropping to USD 71 billion in 2026, according to S&P. The real estate sector has the most bonds due this year (USD 32 billion) and a chunk may end up being restructured as most issuers are in distress, the rating agency wrote. LGFVs (USD 23 billion) and consumer (USD 12 billion) are the next largest sectors.
Sunac China Holdings, the first major developer to enter a second round of restructuring since China’s debt crisis unfolded, seeks to convert all of its offshore bonds into equity, Bloomberg reported. Sunac’s financial advisers told creditors that the debt-to-equity swap was the “only viable plan” because of the persistent headwinds in China’s property market.
In short, they are hoping that creditors would take a chance on an equity upside, rather than pushing for an impractical debt repayment scheme. If Sunac pulls this off, it’s likely to set the blueprint for other Chinese developers given that they also have to bring down their debt to more sustainable levels.
However, some offshore lenders complain that they are getting the shorter end of the stick and the pain should be shared more equitably with their onshore counterparts. It’s no secret that Chinese developers tend to favour local creditors – such as banks, suppliers and homebuyers – because they don’t want to burn bridges in their own country.
In Sino-Ocean Group’s restructuring, an English court ruled in favour of the Chinese developer and allowed state-owned enterprises (SOEs) to remain as significant shareholders because of the value they can bring to the table.
Despite making no direct economic contribution to the restructuring, there was a “rational commercial justification” for two Chinese SOEs to retain a combined holding of around 30% of Sino Ocean’s restructured equity, according to a commentary by Latham & Watkins.
“In fact, the greater risk for creditors and the company was to lose the commercial advantages of having SOE shareholders. It was argued that these advantages facilitated, for example, discussions with local governments in relation to planning matters and, more importantly, created a perception in the debt markets of being lower risk than a privately owned entity,” the law firm wrote.
In short, having an SOE backing makes a difference because it can supposedly open doors in China, where relationships or ‘guan xi’ are a key ingredient in doing business, and lower the perceived risk of the developer in the eyes of investors.
Offshore creditors face an uphill battle to pursue enforcement against defaulters and claw back shreds of recovery, as China Evergrande Group shows. The liquidators of Evergrande, which was once a property behemoth in China, reportedly told a Hong Kong court that its chairman, Hui Ka Yan, would not disclose details of his assets.
It’s tough for foreign lenders to demand fairness when the information, assets and relationships are concentrated onshore. The decks will likely continue being stacked against them unless the rules of the game are changed.
💼 Brief Take: China’s Debt Clearance
12 September 2025
China seems to be drawing the line in the sand by moving to clear the unpaid bills that have clogged its system and stifled business recovery for years.
State-owned banks may have to absorb some of the local government arrears, while the bankruptcy framework could be amended to allow the exit of bad debt.
China is preparing to tackle the significant backlog of unpaid bills owed by local governments to the private sector, an amount some have estimated at over USD 1 trillion, Bloomberg reported on 11 September 2025. The government is considering asking state lenders and policy banks to lend to local authorities so they can make payments in arrears.
Eveline’s Take:
🔸 China seems to be drawing the line in the sand by moving to clear the unpaid bills that have clogged its system and stifled business recovery for years. One of the steps is to enlist state-owned banks to absorb some of these overdue payments and repair confidence in the private sector.
🔸 However, transferring the risk from local governments to the banking sector – which is already grappling with non-performing loans to property developers – may create another problem down the road if there’s no market mechanism for bad debt to exit the system. In short, China has to refine its bankruptcy framework so struggling companies can make way for those with a higher chance of survival.
🔸 Chinese lawmakers have started the first review of draft amendments to the Enterprise Bankruptcy Law, the South China Morning Post reported on 8 September. Since 2021, the law has been included in the annual legislative revision plan of the National People’s Congress (NPC) Standing Committee, but this is reportedly the first time it has reached the review stage.
🔸 The upcoming amendments include measures for 1) asset preservation, 2) asset disposal and creditor protections, 3) enhancing government coordination, 4) as well as other improvements such as to the administrator system, reorganization process, special enterprise bankruptcy, consolidated bankruptcy, and cross-border judicial cooperation, according to a LinkedIn post by a Hong Kong-based lawyer.
🔸 This is significant because Chinese borrowers have deployed a range of tactics to keep their assets away from creditors. These tactics include transferring assets to relatives at below-market prices, using shell companies or offshore trusts to hold assets, or even emigrating and changing their names, IFR wrote, citing a 2025 report jointly published by Beijing Hylands Law Firm, Omni Bridgeway and Global Yudu.
🔸 China is taking action to resolve the debt woes that have jammed up the wheels of its economy – time will tell if it can get these wheels turning again.
💼 Brief Take: The SOE Circles
17 October 2025
China and Indonesia have one thing in common: the circularity of their state-linked entities.
Both countries need to break this cycle by getting third-party funding and unclogging their bad debt.
Beijing is ramping up support towards clearing public-sector arrears owed to businesses, but some localities may hesitate to take on new bank loans due to cost concerns, Caixin reported on 15 October 2025.
Eveline’s Take:
🛟 China and Indonesia have one thing in common: the circularity of their state-linked entities. China’s LGFVs are vehicles for local governments to raise off-balance-sheet debt, such as loans and bonds that are taken up by state-owned banks and other domestic investors. Indonesian SOEs are also interconnected via a web of criss-crossing relationships, including bank and trade debt.
🛟 I wrote on 12 September that China is moving to clear the unpaid bills that have stifled business recovery for years, but transferring the risk from local governments to the banking sector may create another problem down the road if there’s no market mechanism for bad debt to exit the system.
🛟 Arrears owed by local governments likely reached around CNY 4.5 trillion (USD 632 billion) this year, more than 3% of China’s GDP, Caixin reported, citing an estimate by China Chengxin International Credit Rating. China’s “Big Six” state-owned lenders and 12 joint-stock banks were tasked with helping to clear some of these arrears, such as by supporting local SOEs and LGFVs.
🛟 However, several bankers told Caixin that most of the arrears owed by the SOEs stemmed from projects that they took on behalf of local governments. Issuing new loans to these SOEs may amount to creating more off-the-books government debt, one of the bankers said.
🛟 In Indonesia, the SOEs have been practising “gotong royong” or burden-sharing for years. Flag airline Garuda Indonesia, for example, owed trade payables to its state-owned peers including energy giant Pertamina, ground service provider Gapura Angkasa and airport operator Angkasa Pura. It also reported long-term loans from state-owned lenders such as Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI) and Bank Mandiri.
🛟 The state-owned banks rolled over their loans to Garuda while Pertamina is converting the airline’s fuel debt into equity. Sovereign fund Danantara also injected capital to plug Garuda’s negative equity, which partly came from the dividends pooled from other SOEs. As I wrote yesterday, Indonesia is on an all-out mission to turn around the national carrier.
🛟 Another similarity between Indonesia and China is their need to break the circularity of their SOEs by getting third-party funding and unclogging their bad debt. While both countries seem to be trying to do something, their success depends on whether there are enough takers outside their SOE circles.
💼 Brief Take: China’s LGFV Pruning
25 October 2025
China is weeding out the weaker local government financing vehicles (LGFVs) by curbing their debt binge.
The challenge for policymakers is to defuse the LGFV risk without abruptly bursting the bubble like China’s property implosion that was triggered by the “three red lines”.
Bond sales by China’s local government financing arms have fallen to their lowest level since 2020, Bloomberg reported on 22 October 2025. They sold a combined USD 580 billion of bonds across all currencies so far this year, down 13% from the same period last year and 26% lower than a peak in 2023.
Eveline’s Take:
🪴 China is weeding out the weaker local government financing vehicles (LGFVs) by curbing their debt binge. LGFVs were created to help local governments to raise off-balance-sheet funding for key projects such as building infrastructure, but many of these vehicles went on steroids and racked up trillions in hidden debt.
🪴 LGFVs had borrowed a total of CNY 14.3 trillion (USD 2 trillion) at the end of 2023, Caixin reported, citing the Ministry of Finance. In 2023, the Politburo slapped restrictions on a list of nearly 18,000 LGFVs nationwide: these LGFVs can only take on new debt to repay the principal on their outstanding debt, or to fund three major projects defined as building affordable housing, renovating urban villages and constructing public facilities.
🪴 The LGFVs must clear all their debt and fully transform into market-oriented entities by the end of June 2027, Caixin reported, citing documents sent by the central government to its local counterparts. By the end of this year, 70-80% of the LGFVs on the initial 2023 list are expected to have been delisted. However, Caixin’s sources said that some local governments are simply relabelling the LGFVs to get them off the list and raise more money.
🪴 I wrote last week that LGFV borrowings, such as bonds and loans, were taken up by state-owned banks and other domestic investors, creating an interconnected web that’s tricky to untangle. I also noted that transferring the risk from local governments to the state-owned banks may create another problem down the road if there’s no market mechanism for bad debt to exit the system.
🪴 China imposed the “three red lines” policy five years ago to rein the runaway debt in the property sector, but it triggered an implosion with far-reaching consequences that the policymakers are still trying to contain. This time, the challenge is to defuse the LGFV risk without abruptly bursting the bubble.
📒 Quick Take: Asian Sovereigns’ Tug of War
6 November 2025
State-linked entities across India, Indonesia and China are caught between performing their national duty and reining in leverage.
China is trying to gradually defuse its LGFV risk, but local governments are intertwined with the property sector.
State-linked entities across India, Indonesia and China are caught between performing their national duty and reining in leverage.
This tug-of-war has long been a feature in the sovereign space, but now the stakes are higher because of the growing pile of debt to cover the costs of building infrastructure and subsidizing public services. Some of these state-linked entities loaded up on debt to bridge the funding gap as they were barred from raising prices.
Despite three federal bailouts worth billions of dollars over two decades, India’s state-run power distributors had accumulated INR 7.08 trillion (USD 80.6 billion) in losses and INR 7.42 trillion (USD 84.4 billion) in outstanding debt as of March 2024, according to Reuters.
India is considering a bailout of more than INR 1 trillion (USD 12 billion) for these companies, Reuters reported, citing three government officials and a document outlining the plan prepared by the Ministry of Power. To receive the funds, the states will be required to privatize their electric utilities and transfer managerial control, or keep control but list them on a stock exchange.
In Indonesia, state-owned electricity distributor Perusahaan Listrik Negara (PLN) was also mandated to keep tariffs affordable. PLN is supposed to receive “compensation income” from the government as reimbursement, but delayed payments would risk straining its cashflow.
The new Finance Minister, Purbaya Yudhi Sadewa, announced last week that he would speed up the compensation payment to PLN and state-owned energy giant Pertamina. While this should bring some relief to the SOEs, the Finance Ministry has to juggle competing demands even as Indonesia’s economic growth slowed to 5.04% in the third quarter.
Back in April, I flagged that the construction of the Jakarta-Bandung high-speed rail – known as Whoosh – carried a roughly USD 7 billion price tag that may keep ballooning. I also noted last month that Sadewa had insisted that Whoosh was the responsibility of Indonesian sovereign fund Danantara, not his ministry.
However, President Prabowo Subianto told reporters this week that the joint venture operating Whoosh, Kereta Cepat Indonesia China (KCIC), will receive support from the state coffers after all. Given that the boss has weighed in, the finance minister will likely have to cough up the fiscal support.
And in China, I wrote last month that local government financing vehicles (LGFVs) were tasked to raise funding for key projects, but many of them went out of control and ended up creating a debt mountain. I also noted that China seems to be weeding out the weaker LGFVs, akin to gradually releasing steam from a pressure cooker.
The officials are probably keen to avoid the property implosion triggered by the implementation of the “three red lines” policy five years ago. However, many local governments are intertwined with the property sector, as they relied on land sales for income while the developers were a significant source of employment.
Chinese real estate is also not out of the woods yet, as even China Vanke – which was previously seen as one of the stronger developers because of its state backing – has been spiralling downwards. Vanke’s bonds plunged this week after its state-owned shareholder, Shenzhen Metro Group, requested collateral or pledges for previously unsecured loans totalling CNY 20.4 billion (USD 2.9 billion).
If there’s any consolation for these Asian state-linked entities, it’s that they’re not alone in their struggle to make money.
👣 Asia’s Restructuring Milestones: China’s Double Helix
16 November 2025
China’s bankruptcy law should be revised to tackle zombie companies that are sucking precious resources from more promising businesses.
Officials need an upgraded toolkit to untangle China’s heavily indebted property and LGFV sectors.
Asia’s restructuring landscape has seen several milestones this year, including a proposed overhaul of China’s bankruptcy law that could be its most sweeping reform in nearly two decades.
On 12 September 2025, the Legislative Affairs Commission released a draft revision of the Enterprise Bankruptcy Law for public consultation, following its first reading at the 17th session of the Standing Committee of the 14th National People’s Congress (NPC). The draft will be reviewed by the NPC Standing Committee before potential adoption.
This represents the most ambitious reform of China’s bankruptcy regime since 2006, according to Professor Xiahong Chen, a fellow of the Research Center of Bankruptcy Law and Enterprise Restructuring at the China University of Political Science and Law. It would also mark China’s fifth bankruptcy law in the past 120 years and the third since 1949.
“Its evolution reflects the country’s transformation from an agrarian society to a market-oriented economy, alongside a profound shift in attitudes toward debt,” Chen wrote. “Where debtors were once criminalized and no culture of discharge existed, concepts such as forgiveness, corporate rescue, and alignment with international standards are now broadly accepted.”
When it was implemented under a centrally planned economy in 1986, the bankruptcy law primarily served as a punitive tool against failing state-owned enterprises. Following the growth of the market economy in the 1990s, a new law in 2006 introduced modern procedures – liquidation, settlement, and reorganization – alongside diverse case administration models.
However, the rise in “zombie enterprises” in subsequent years highlighted gaps in clarity and tools, Chen said, noting that the latest draft was designed as a response to these challenges. The purpose of the law was stated as “promoting the survival of the fittest and the optimal allocation of resources among market entities, and preventing and mitigating major risks.”
While retaining the overall structure of the 2006 law, the 2025 draft introduces innovations such as quasi-consumer bankruptcy, group insolvency, and cross-border rules. (Click here for the key points I extracted from Chen’s article).
Zombie Companies
A revision to the bankruptcy law is necessary to tackle zombie companies that are multiplying and sucking precious resources from more promising businesses.
China was laying the groundwork to clear the unpaid bills owed by local governments to private enterprises, but I wrote two months ago that transferring the risk to the banks may create another problem if there’s no market mechanism for bad debt to exit the system.
China seems to be gradually weeding out the weaker local government financing vehicles (LGFVs), as officials seek to avoid a repeat of the property meltdown that was triggered by the “three red lines” policy five years ago. However, I noted that both sectors are entangled, as local governments relied on land sales for income and the developers are a significant source of employment.
LGFVs had an average debt-to-EBITDA of 28x last year, nearly triple the ratio for commercialized SOEs, according to S&P Global Ratings. The government’s 2027 deadline for LGFVs to reach commercial viability will not be a hard stop, as “the LGFVs have a lot more to do to genuinely de-risk,” S&P’s Christopher Yip said. “In the meantime, there will be more kicking the can down the road.”
A prolonged property slump was perceived as the biggest risk to China’s stable growth, according to a poll with 83 votes collected at S&P’s China Credit Spotlight conference. This was followed by local government and LGFV debt risks, as well as “involution” (excessive domestic competition) and overcapacity.
Former Finance Minister Lou Jiwei also warned this week that China’s property market has not bottomed out yet and may continue hindering economic growth for another five years, South China Morning Post reported.
China is facing a twin set of problems – property and LGFVs – that are intertwined with each other like a double helix. Officials need an upgraded toolkit to unwind these strands.