China debt defaults by state-owned firms spark concerns in bond markets

A man is counting 100 renminbi notes, the Chinese currency.

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SINGAPORE – A series of high-profile defaults involving state-owned companies in China – generally a safe pick for investors – have rattled the credit market and shocked investors, which last week saw the bond market selloff Is leading.

As the bleeding further points to signs of more bond defaults, observers are debating the question of why more state-owned enterprises (SOEs) are being put on hold this time than in the last two decades And if in which part of the market, anyone, does the government want to support.

State-owned miner Yongcheng Coal and Power runs into default over a billion yuan ($ 151.9 billion) bond last week on suspicion of tampering an extensive state investigation into three underwriting banks.

Other high-profile debt defaults suffered later this week, including the government-backed chipmaker Tsinghua Unigroup, which missed payments after failing to extend its deadline for repayment, and state-owned Huachen Another default by Automotive Group – a Chinese joint venture partner of BMW. Last month, China Evergreen, one of China’s largest property developers, also came into limelight for alleged cash shortage issues.

” [Yongcheng] China Markets Economist Zhaopeng Jing of ANZ Research wrote in a note on Thursday, “The default makes investors worry about the entire corporate bond market, as it breaks the long-held notion of an implicit government guarantee.” is. SOEs are currently less than 1% according to ANZ data, compared to a 9% default rate by private enterprises.

The omissions of government-backed firms in China were rare before recent times. 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 by Chinese authorities in the form of reflexes on the diversion of SOEs are now coming to the fore that the worst phase of the epidemic has passed.

Chang Li

S&P Global Ratings

These defaults are also coming in the form of many asset managers, accelerating the Chinese debt, pushing calls on investment in Chinese bonds this year. They make a very attractive offer for investors with their yields – higher than US or European yields – in a world where it is hard to come by fast.

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

So far this year, investors have defrauded him. According to refinitive data, foreign investment in foreign sugar bonds increased through funds with annual income of $ 21.43 billion in March compared to $ 9.5 billion at the end of last year. IShares Barclays USD Asia High Yield Bond is up more than 31% since its low in March.

Analysts believe there are some factors in the game of defaults involving Chinese state-owned enterprises.

Recover from epidemic

The Chinese government may be ready to accept more and more defaults as the economy recovers from the epidemic. Coupled with its desire to reduce debt in the economy, says S&P Global Ratings in a note on Tuesday.

Chang Li, China’s expert on S&P Global Ratings, said, “Chinese authorities are now making a comeback as Chinese officials over the deviation of SOEs.

Beijing was on an altercation drive in the country with date skirting, but hit off businesses as the epidemic struck. Instead, the authorities Encouraged banks to approve more loans to small and medium businesses. But now, debt is rising again as the epidemic has put the business under pressure — with key executives refocusing on reducing debt levels.

The note stated, “We think domestic selling shares were faster than foreign stocks, indicating a potential willingness to allow large SOEs to default.”

The market may see this as an indication that SOE deviations and corrections will accelerate as the economy recovers from the epidemic.

Chang Li

S&P Global Ratings

S&P flagged off the example of state-owned miner Yongcheng Coal and Electricity – which missed its bond payment due on 10 November. This could lead to cross defaults by its parent company, Henan Energy and Chemical Industry, which is one of the largest in the state. Owned firms in Henan Province said. Together, 50 billion yuan (7.6 billion dollars) is at risk of default, according to the rating firm.

The S&P pointed to the “abrupt removal of government support” in the case of the coal miner. Exactly one month before the default, the rating firm said that Yongcheng was supposed to swap loss-making chemical businesses for profitable coal businesses. Additionally, it issued only 1 billion yuan of medium-term note in October.

According to the S&P those actions were simultaneously taken as “signs of government support”.

“in our view, [Yongcheng]Lee’s payment surprised the market as it indicated that the local government’s attitude of providing support had changed within just one month, “Lee said.” The market may see this as an indication that SOE deviations and corrections will accelerate as the economy recovers. Epidemic. “

Spoilage opportunity?

“The Chinese government is allowing some companies to go to the hedge with a weak credit matrix”, said Tan Min Lan, Asia Pacific head of the chief investment office at UBS Global Wealth Management. “

But this is indeed a positive, she said, suggesting that some “discrimination” is allowed in the Chinese market between strong and weak firms.

“We have been saying for some time that increasing credit discrimination is actually a positive for the long-term growth of the Chinese market. Now if you are resting just 2 years ago, there is absolutely no discrimination, because someone Do not miss, ”he said. CNBC’s “Squawk Box Asia” on Wednesday.

Epidemic blocks economic res

The coronovirus epidemic has riddled public res as the government acted on incentives to support businesses amid the decline.

The effect is probably being felt now itself.

S&P Global Ratings said “the epidemic and fast-growing regulations of central authorities can control the power of local governments, and even the willingness to provide aid”.

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