Commentary on Political Economy

Tuesday 17 November 2020



China SOEs nervousness derails $2.4bn in planned bond sales

Tsinghua Unigroup, a state-backed national champion, reportedly failed to make a bond payment, raising fresh questions about its solvency © REUTERS

At least 20 Chinese companies have suspended planned bond sales worth Rmb15.5bn ($2.4bn) over the past week, as the high-profile defaults of three state-owned enterprises and questions about the solvency of a fourth unnerved investors in the world’s second-largest bond market.

Investors dumped bond holdings last week after Yongcheng Coal & Electricity, a state-owned enterprise based in Henan province, defaulted on a Rmb1bn bond. It was the second high-profile SOE default in recent weeks after Huachen Automotive Group, an industrial group whose assets include a stake in BMW’s China joint venture.

On Tuesday, Caixin, a Chinese financial publication, reported that Beijing-based semiconductor company Tsinghua Unigroup had failed to meet a bond payment. Tsinghua Unigroup was not immediately available for comment.

The company, a state-backed national champion into which Beijing has poured billions in its drive for tech self-reliance, has long been thought to have rock-solid government backing. But in November last year, the group was forced to reassure investors it had ample cash, as worries about its finances snowballed.

All the companies that have suspended bond sales in the past week blamed “recent market turmoil”. According to data from information provider Wind, they include Henan Transportation and Shipping Development, a state-owned group that was due to close a Rmb1.8bn bond sale on Tuesday.

Local SOEs account for over half of outstanding corporate bonds in China. A continued sell-off would lead to a complete halt of bond issuance

Sean Ding at Plenum, a Beijing-based consultancy

Many investors in China have long assumed SOE debt is safe because they believe local or central governments will step in to prevent defaults.

The Henan provincial government, however, has not publicly promised to backstop Yongcheng Coal’s debts. Since its default, the company has only agreed to honour a Rmb32.4m interest payment.

In a meeting with bondholders on November 12, a senior executive said the group had been unable to access cash reserves tied up in restricted deposits to avoid default. But he predicted the government would not allow the company to go under.

“There is no way that we will be liquidated according to market principles,” the executive added, according to a transcript of his comments viewed by the Financial Times. “We have more than 180,000 employees. If we go under, our workers will lose their jobs . . . Does the provincial government not know the consequence of this?”

By contrast, Shanxi, a coal-rich province bordering Henan, has rushed to assure investors it would back its SOEs.

“Local SOEs account for over half of outstanding corporate bonds in China,” said Sean Ding at Plenum, a Beijing-based consultancy. “A continued sell-off would lead to a complete halt of bond issuance.”

The diverging responses have sparked questions over whether Beijing is leaving provinces to deal with the problems or opting to allow market forces to weed out weaklings.

The tremors are also affecting smaller regional lenders. Inner Mongolia-based Baoshang Bank, which was taken over by the central government last year, said it would not pay back principal and interest on a Rmb6.5bn bond.

Baoshang’s announcement caught the market off guard, as bondholders in two other banks rescued last year, Hengfeng Bank and Bank of Jinzhou, have been protected.

“This incident does raise concern for investors who hold hybrid bonds of small and midsized banks with inadequate capital bases and high bad debt ratios, since government support . . . may not be available for hybrid instruments issued by these banks,” S&P analysts Luan Xiaochen and Ying Li wrote in a research note.

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