The differences between macroeconomics and microeconomics are vast and plentiful. But there are still some similarities when it comes to comparing the two.
For example, imagine a person who lives off credit cards. They may be able to maintain an extravagant life for a while, chipping away at their debt while continuing to spend like there is no tomorrow. But while things look good on the outside, there are problems within.
Lenders want their money, as they have their own debts to cover. And when a few unforeseen crises or big expenses pop up, the entire operation can come crashing down. A country going into debt isn’t exactly the same. They have more people paying in, so it becomes easier to chip away at their debt. But there’s still the same issue of runaway spending being too tempting to ignore – and the same possibility of disaster striking.
That’s what is happening now in one of the world’s biggest economies. China listed one of the biggest defaults of debt in corporate history this month, as a big corporate player proved unable to repay their massive $11 billion debt. How could a company rack up so much debt? It has to do with changes in China’s economic policy.
China had promoted a credit policy that made spending more alluring until recently, when they changed things up took a lot of the leverage away from lenders. This put more pressure on borrowers and also did what soaring debt always does on a national level – hurt the value of the currency, thus making repayment even tougher.
Wintime Energy Co. was once one of the most impressive companies in northern Shanxi, but they quadrupled their debt in a period of not more than five years. Their first plan was to use the borrowing and credit expansion options to expand their own company. They had plans of branching out into the areas of finance and logistics, but President Xi Jinping put a focus on controlling financial risks two years ago – and that was the beginning of the end of Wintime’s success.
In an economy that now relies on bonds for much of its financing, Wintime was running out of options. Even trying to sell assets didn’t help them overcome their debt woes. Due diligence in financial responsibility on both a consumer and corporate level wasn’t too crucial in China – at least until 2014, when default options became less plentiful.
Qin Han, the chief fixed income analyst for Guotai Junan Securities Co., said: “China’s economic growth was largely driven by debt and its corporate debt looks like a Ponzi scheme. More firms may give up on repaying debt if they encounter financing difficulties.”
Earlier this month, the company defaulted on 1.5 billion yuan in debt, which created a domino effect and led to defaults on over a dozen other bonds. The total then grew to 9.9 billion yuan, leaving stockholders stuck with the company’s suspended trading shares.
Wintime’s story may bring share pledging into question – a questionable process used for claiming funds, and one they relied on heavily throughout the years.