Commentary on Political Economy

Monday, 30 November 2020



China state-owned group caught in default storm owes banks billions

Chinese banknote against backdrop of China’s flag
A flurry of defaults have shattered a longstanding belief among investors that local governments in China will always bail out troubled state-backed groups © Reuters

A state-owned Chinese group caught up in the country’s spate of defaults owes billions of dollars to lenders, raising concerns that bond market tremors could also sweep through the banking sector.

According to a creditor document viewed by the Financial Times, almost 70 Chinese and foreign banks, as well as trust companies, had Rmb33.5bn ($5.1bn) in outstanding lending to Huachen Automotive Group as of last year. The revelation comes as the country’s multi trillion-dollar debt markets have been rocked by defaults at government-backed companies.

The defaults have shattered a longstanding belief among investors that local governments in China will always bail out troubled state-backed groups and have prompted fears about the health of the broader financial system.

Some creditors said they are reassessing their exposure to Huachen, whose subsidiaries include BMW’s partner in its China manufacturing joint venture, after it defaulted on a Rmb1bn bond in October. Huachen, based in the northeastern city of Shenyang, is controlled by the Liaoning provincial government.

Amount Huachen owes two of China’s big state-owned policy banks

“We worked with Huachen because it is the biggest state-owned enterprise in Liaoning and the local government can’t afford to let it go under,” a banker at one of Huachen’s creditors told the FT.

Those that extended credit to Huachen include China Construction Bank and Industrial and Commercial Bank of China, two of the country’s “big four” state banks. Huachen owed them Rmb2bn and Rmb642m, respectively, according to the creditor document which tallied the group’s loans through to September last year.

Huachen’s largest foreign creditor is Singapore’s DBS, which was owed Rmb779m.

According to people directly involved in discussions between Huachen, Liaoning province and the group’s creditor banks, the lending figures have not changed substantially since then.

Wei He, an analyst at Gavekal Dragonomics, said that the flurry of recent defaults could result in a deterioration in asset quality at Chinese banks. These lenders’ operations are heavily influenced by the government and they have a strong incentive to support local SOEs. “Gone are the days when Chinese banks could roll over troubled debt indefinitely to make their financial statements look good,” said Mr He.

Huachen Automotive Group’s bank borrowings
LenderLoan amount (Rmb m)
China Everbright Bank3,314
Xingye Bank2,891
Shengjing Bank2,887
Huaxia Bank2,054
China Construction Bank2,015
Export-Import Bank of China1,800
Bank of Fuxin1,000
Bank of Jinzhou950
Xiamen International Bank945
China Minsheng Bank850
Development Bank of Singapore779
As of September 2019
Source: Creditor documents

Huachen had also borrowed a total of Rmb2.5bn from two large, centrally controlled state policy banks: China Development Bank and Export-Import Bank of China. Foreign investors have rushed into Chinese policy bank bonds at a record pace this year.

CDB’s brokerage arm underwrote Huachen bonds worth more than Rmb9bn, including the one it defaulted on. CDB Securities itself held Rmb1bn worth of Huachen debt.

Bank of Jinzhou, a small Liaoning-based lender that was rescued by ICBC last year, was owed Rmb950m. Jinzhou was one of three small banks that were either closed or restructured in 2019. Small banks such as Jinzhou, which have come under increasing pressure over recent years, account for more than 30 per cent of Huachen’s outstanding borrowings.

Issues at Huachen and elsewhere could have wider implications for how credit flows through China’s financial system.

Chinese banks typically assign annual lending quotas for provinces and cities. Liaoning’s state-dominated industrial sector has traditionally been backed by state-owned financial institutions, based on the assumption it enjoyed rock-solid support from the province’s government.

But the banker at one of Huachen’s creditors said that if provincial officials did not broker a “good solution” between the group and those it owes, “we will significantly cut our Liaoning lending quota”.

One bondholder told the FT that Huachen and Liaoning officials have taken a hard line in their negotiations with creditors. “Huachen and the local government think banks should make concessions to support [Liaoning’s] economy,” they said.

DBS said: “A failure to deal with [Huachen’s] debt issue will shake the confidence of foreign institutions and global investors, including DBS, in the business environment and economic prospects of Liaoning and northeastern China.”

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