Dongbei Special Steel Group Co Ltd, a State-owned steelmaker in northeastern China, started bankruptcy proceedings on Monday.
It is the first steel company to go bankrupt in the endeavor to restructure the country's iron and steel industry, according to a statement made by the company's listed subsidiary Fushun Special Steel Co Ltd.
So far, Dongbei Special Steel, which is based in Dalian, Liaoning province, has defaulted nine times. The principal loss has amounted to 5.8 billion yuan ($865 million).
Dongbei Special Steel was formed in 2004. Dongbei Special Steel is the controlling shareholder of Fushun Special Steel, listed on the Shanghai Stock Exchange, which made the bankruptcy announcement.
About 496.9 million shares of Fushun Special Steel, or 38.22 percent of its total shares, held by Dongbei Special Steel were frozen by the court on Monday.
The bankruptcy is the result of the company's creditors' application to the court. It has nine months to come up with a restructuring plan.
Dongbei Special Steel's products have been exported to more than 20 countries and regions, including carbon structural steel, alloy steel, tool steel, stainless steel and bearing steel.
"It's rare for State-owned companies to go bankrupt. But, the government won't pay too much to bail it out," said Liu Xinwei, an analyst at chem99.com, a bulk commodity information and consultancy website.
Liu said that eliminating problematic assets is actually a good thing for the industry. The government also would like to see more market forces involved in the industry to get rid of the outdated capacity.
According to Liu, special steel normally has high profit margin. One of the direct causes for the default is that the company has invested in some projects in Dalian, which has caused a heavy burden on its cash flow.
"Last year, profits of Chinese steelmakers were generally quite good. The default of Dongbei Special Steel is mainly because it has raised too much debt," said Liu.
According to Xu Jisheng, deputy director of the State-owned Assets Supervision and Administration Commission of Liaoning Province, the provincial government has mobilized a lot of resources to help the company pay back the debt. Now, the company is able to sustain normal production even though the debt is not being repaid.
Dongbei Special Steel had tried a debt-to-equity plan, but met resistance from its creditors.
The company's chairman, Yang Hua, committed suicide in March 2016, days before the first default. The company has not made public any financial reports since September 2015, defying persistent demands from its creditors.
Another State-owned steelmaker mired in debt crisis is Bohai Steel Group based in Tianjin, whose debts stand at 192 billion yuan. It began debt restructuring in March.
A restructuring plan, including issuing corporate bonds, was finalized for Bohai Steel in late September.
The slimming down of Chinese steel smelters, with a purpose of shedding crude steel capacity by 100 to 150 million metric tons in five years starting in 2016, has seen consolidation previously take place by mergers.