Commentary on Political Economy

Thursday, 19 November 2020


China Deepens Probe on Banks After Busted Bond Deal

Bloomberg News
  • Industrial Bank, China Everbright are added to probe
  • Defaults by state-owned firms have roiled credit market

China’s market regulator expanded its investigation into bond sales for a state-backed coal miner that unexpectedly defaulted on payments last week, dragging in a number of banks, rating and accounting firms.

Industrial Bank Co.China Everbright Bank Co., Zhongyuan Bank Co., China Chengxin International Credit Rating and Xigema Certified Public Accountants are being probed for alleged irregularities, the National Association of Financial Market Institutional Investors said in a statement. Haitong Securities Co. was earlier this week also put under investigation.

The probe centers around deals for Yongcheng Coal & Electricity Holding Group Co., whose missed payment last week rocked the Chinese credit market. That default was followed by others from state-linked firms, long considered to be immune from such credit events because of their implicit government backing. The turmoil has caused a selloff in bonds and some deals to be scrapped.

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Amid the deepening stress, officials from China’s State Council have asked government departments to conduct a risk assessment, people familiar with the matter have said. The aim is to ensure stability in the financial markets and to prevent any spillover that could cause systemic risks, according to the people.

All the parties under investigation declined to immediately comment. Industrial Bank dropped 1.7% and while Everbright Bank fell 2.5% as of 10:42 a.m. in Shanghai.

Yongcheng Coal is being probed for potential violations, including disclosing false information, after failing to make a payment on a 1 billion yuan ($152 million) short-term note. The firm, which had been rated AAA by a local rating company and since downgraded to junk, cited “tight liquidity” for the default. Others missing payments include Tsinghua Unigroup Co. and Brilliance Auto Group Holdings Co., a Chinese automaker linked to BMW AG.

NAFMII is an interbank market watchdog supervised by China’s central bank.

Probes by the watchdog into irregularities aren’t unusual. For instance, the NAFMII in late April started an investigation into two investment banks involved in a deal with an unusually low fee. The penalties have varied from warnings to a ban on underwriting or debt financing activities.

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