China’s central bank could intervene as state-firm bond defaults rise: Analyst

A man wears a protective mask while running behind The People’s Bank of China in Beijing.

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SINGAPORE – According to Hao Hong of Bank of Communications International, the People’s Bank of China (PBOC) may step in after several recent bond defaults by firms linked to the Chinese state.

On Friday, the firm’s managing director and head of research at CNBC’s “Street Signs Asia” said, “The default situation has somehow flashed in the past few weeks.”

“I wouldn’t be surprised to see PBOC interference from here,” he said.

Earlier in November, state-owned coal miner Yongcheng Coal and Electricity defaulted on 1 billion yuan (about $ 152.01 million) bond, giving investors a firm AAA-rating by a domestic agency that caught the guard. Other high-profile debt defaults, including government-backed chipmaker Tsinghua Unigroup.

Hong said it is “best interests” for the Chinese central bank to maintain sufficient liquidity to avoid “systemic risk”.

The PBOC had earlier warned in its Financial Stability Report that factors such as reliance on debt by some large firms to repay debt could pose a threat to the entire economy, according to CNBC’s translation of the Mandarin language.

The analyst said, “I think the recent corporate default is attracting people’s attention.” “I would say that, you know, it’s related because it’s coming from (state-owned enterprises), but then at the same time, it’s a relatively small amount in a very large market.”

Asked if the bond market could ease concerns, Hong highlighted “a very large bid from unknown buyers”, which will go into the market tomorrow to “shore up” suspicious bonds – usually linked to government-related entities an activity.

He also compared the situation with China’s “unprecedented liquidity crisis” in 2013, when the money market rate soared and short-term rates touched record highs.

“During that time, the overnight interest rate was around 50%,” Hong said. “We haven’t seen that kind of level for interest rate for years and years since.”

– CNBC’s Weizen Tan and Yen Ni Li contributed to this report.

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