Home Business China’s push to cut carbon emissions boosts risks for the north

China’s push to cut carbon emissions boosts risks for the north

Workers cut up coal carts in Dec. 2019 at a coal mine in Mentougou, west of Beijing, where many mines have been shut as China scrambles to cut carbon emissions.

Greg Baker | AFP | Getty Images

BEIJING — China’s bond defaults are increasingly concentrated in a part of the country whose growth could face greater pressure from tough new restrictions on carbon emissions, according to analysis from Nomura.

Fifteen regions in the northern half of China, including Beijing and Inner Mongolia, accounted for 63.4% of the number of national bond defaults last year, up from 51.5% in 2019, according to Nomura’s estimates published in an April 27 report.

It’s the latest sign of growing economic disparity within the country, where GDP and population growth in the north already lags that of the south. Now, China’s pledge to to reduce carbon emissions by 2030 means production restrictions are coming for the northern region’s economy.

“The new environmental campaign has the potential to hit North China — where a majority of steel, aluminum, and other raw materials are produced and processed — especially hard,” the Nomura analysts wrote.

“Since most of those steel and aluminum plants are in low-tier (less developed) cities, the public financials of these cities will likely be disproportionately impacted, adding to credit default risks,” they said.

Historical factors

The north also relies more on debt. Outstanding corporate bonds as a percentage of GDP in North China rose to 52% in 2020, versus 30% for South China, according to Nomura.

“The north/south divide could become an important factor for credit differentiation in the years ahead,” the report said. “Indeed, we have already observed some deterioration in the capacity of the North China provinces to obtain funding from bond markets.”

The north accounted for 10% of national corporate bond issuance in the first quarter, down from 42% for all of last year, the analysts said.

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