Commentary on Political Economy

Thursday, 12 November 2020



China State Banks Cut Corporate Bond Exposure Amid Rout

Bloomberg News
  • Lenders beefing up risk control after string of defaults
  • Chinese state-owned firms dollar bonds tumbled this week

A number of Chinese banks are cutting their holdings of corporate bonds, with some focusing on notes sold by state-owned firms, after a string of defaults roiled the market, according to people familiar with the matter.

At least six banks, including one of China’s four largest lenders, are reducing their overall corporate bond exposure, the people said, asking that they and their institutions not be identified discussing private matters. Of those, five are selling debt issued by state-owned companies, according to the people.

These banks, along with another that hasn’t cut its holdings, are also reviewing their positions and requiring senior-executive approvals for any additional purchases of corporate bonds, the people said. Two of the people said their banks’ efforts were focused on issuers from northern China.

Lenders have been major buyers of the debt of state-run companies, but are now being forced to reassess their belief that such companies would honor their obligations. Confidence has been shaken by defaults by firms with ties to the state, including Peking University Founder Group. Dollar bonds sold by several Chinese state-owned firms tumbled this week after a default by state-owned Yongcheng Coal & Electricity Holding Group Co. on Tuesday.

That default and growing concerns over a liquidity crunch at Tsinghua Unigroup Co. have sparked fresh concerns over government support for weaker state-owned firms, according to Wu Qiong, executive director at BOC International Holdings Ltd.

Three commercial banks also decided this week that they will no longer accept high-rated corporate bonds as collateral for repo trades and that all corporate bond investments will need to be approved by the bank’s headquarters, according to people familiar with the matter.

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