A surprise spate of bond defaults by state-owned Chinese firms is spooking investors


A man counting 100 renminbi banknotes, the Chinese currency.

Sheldon Cooper | SOPA Pictures | LightRocket via Getty Images

SINGAPORE – A series of high-profile defaults involving state-owned companies in China – normally a safe choice for investors – rocked the credit market and rocked investors, leading to the bond market liquidation last week.

As the bleeding continues to show signs of more bond defaults to come, observers are debating why more state-owned enterprises (SOEs) are being left out in the cold this time around compared to the past two decades. and which market segments, if the government will choose to support them.

State miner Yongcheng Coal and Electricity defaulted last week on a 1 billion yuan ($ 151.9 million) bond, triggering an extended state investigation of three underwriting banks suspected of misconduct.

Other high-profile defaults followed suit this week, including government-backed chipmaker Tsinghua Unigroup, which missed payment after failing to extend its repayment deadline, and another company default. public Huachen Automotive Group – a Chinese joint venture partner of BMW. One of China’s biggest real estate developers last month China Evergrande was also honored for apparently having cash crunch problems.

“The [Yongcheng] The default has triggered investor concerns about the overall corporate bond market, as it shatters the long-held assumption of an implied government guarantee for government bonds, ”the economist wrote. Chinese markets from ANZ Research Zhaopeng Xing in a note Friday. The first default rate for state-owned enterprises is well below 1% currently, compared to the 9% default rate for private enterprises, according to ANZ data.

Bankruptcies of government-backed companies in China were rare until recently. At the end of last December, the case of a dollar bond default by commodity trader Tewoo Group was the first in two decades.

More defaults are coming as Chinese authorities refocus on deleveraging state-owned enterprises now that the worst of the pandemic has passed.

Chang Li

S&P Global Ratings

These defaults are occurring even as many asset managers, bullish on Chinese debt, have pushed this year to invest in Chinese bonds. They offer a very attractive proposition for investors with their returns – much higher than American or European returns – in a world where it is more and more difficult to find.

China’s onshore bond market is worth $ 13 trillion, the second largest in the world.

So far this year, investors have let them go. Foreign inflows into Chinese onshore bonds via funds peaked at $ 21.43 billion in March, up from $ 9.5 billion at the end of last year, according to data from Refinitiv. The iShares Barclays USD Asia High Yield Bond is up more than 31% from a March low.

Here’s what analysts think certain factors are at play in the recent wave of defaults involving Chinese state-owned companies.

Pandemic recovery

Chinese government may be more willing to accept defaults as economy recovers from pandemic coupled with its drive to reduce the economy’s debt, S&P Global Ratings said in a note Tuesday.

“More defaults are coming as Chinese authorities refocus on deleveraging public enterprises now that the worst of the pandemic has passed,” said Chang Li, China Country Specialist at S&P Global Ratings.

Beijing had embarked on a deleveraging campaign with soaring debt in the country, but resisted as the pandemic hit businesses. Instead, the authorities encouraged banks to approve more loans to small and medium enterprises. But now debt is rising again as the pandemic has put companies under pressure, which has led authorities to refocus on reducing the level of debt.

“In our view, the sell-offs, which have been more marked for domestic bonds than for foreign bonds, reflect the potential willingness to let even large state-owned enterprises default,” the note added.

The market may see this as a signal that deleveraging and SOE reform will accelerate as the economy recovers from the pandemic.

Chang Li

S&P Global Ratings

S&P pointed to the example of state miner Yongcheng Coal and Electricity – which missed its bond payment due on November 10. This could lead to a cross default of its parent company Henan Energy and Chemical Industry, one of the larger states. companies owned by Henan Province, he said. Together, that puts 50 billion yuan ($ 7.6 billion) at risk of default, according to the rating company.

S&P pointed to “the seemingly abrupt withdrawal of government support” in the case of the coal miner. Just a month before its default, the rating company said Yongcheng was supposed to swap loss-making chemicals companies for profitable coal companies. In addition, it had just issued a 1 billion yuan medium-term note in October.

These actions were taken together as “signs of government support,” according to S&P.

“In our vision, [Yongcheng]The non-payment of the payment surprised the market as it indicated that the attitude of the local government to providing support had been reversed within just a month, ”Li said of the pandemic. “

Possibility of eliminating the bad?

The Chinese government has allowed some companies “with very low credit matrices to go bankrupt without bailouts,” said Tan Min Lan, director of the Asia-Pacific investment office at UBS Global Wealth Management.

But that’s actually a bright spot, she said, suggesting it allows for some “differentiation” in the Chinese market between stronger and weaker companies.

“We have been saying for some time now that increasing credit differentiation is actually a benefit for the long term development of the Chinese market. Now if you relax 2 years ago, there is absolutely no no differentiation because there are no defaults, ”she said. CNBC’s “Squawk Box Asia” Wednesday.

The pandemic is straining financial resources

The coronavirus pandemic has strained public resources as the government embarked on a stimulus to support businesses amid the fallout.

The impact is probably being felt now.

“The pandemic and increasingly stringent central government regulations could restrict the power of local governments to coordinate financial resources, and even the willingness to provide support,” said S&P Global Ratings.


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