Chinese debt defaults send investors into a tizzy

15 December, 2020 12:00 AM printer

BEIJING: Despite claims of an economic recovery, Chinese state-owned companies are defaulting on their debts. A string of missed debt repayments by major firms has shaken local as well as global markets. State firms defaulted on a record $6.1 billion worth of bonds between January and October, according to Fitch Ratings.

That’s about as much as the last two years combined. The development has rattled China’s nearly $4 trillion corporate debt market, of which state-owned enterprises are estimated to account for more than half. At least 20 firms suspended plans for new debt issues totalling $2.4 billion, all citing recent market turmoil, report agencies.

The mounting non-payment of debt payments is getting worse in recent weeks. A slew of major companies, including German automaker BMW’s Chinese partner Brilliance Auto Group, top smartphone chipmaker Tsinghua Unigroup, and Yongcheng Coal and Electricity declared bankruptcy or defaulted on their loans in November.

This was enough to send shock waves through debt market. Bond prices nosedived sharply, interest rates soared and the turmoil even spilt over into the stock market, with shares of state-owned firms plummeting.

The defaults have angered global investors, who say their faith in the firms’ top-notch ratings, seemingly sound finances and implicit state backing has been violated. There is a panic among investors who believed that the close relationships between these companies and Chinese governments make them safe bets in times of trouble.

But investors are a worried lot as the state is no longer willing to support these companies; investments have suddenly become much riskier propositions.

“The credibility of government guarantees has been the most important bulwark against financial crisis so far. Now we are seeing signs that this credibility is eroding,” according to Logan Wright, director of China markets research at Rhodium Group, CNN reported.

According to Reuters, the Huachen Automotive Group Holdings Co, the parent of German automaker BMW’s Chinese joint venture partner, defaulted late last month exemplifying opaque risks, underdeveloped pricing mechanisms and investor naivety in China’s corporate bond market.

“If the company had told investors it was in great trouble, I wouldn’t have bought and held the bonds,” said Shanghai-based hedge fund manager Vincent Jin, who bought Huachen bonds early this year.

Huachen boasted an AAA issuer rating when it launched its 1 billion yuan ($151.93 million) three-year, privately placed bond in October 2017. It comes from one of China’s poorer provinces, Liaoning, but as recently as April told bondholders it had adequate cash, lots of land and state backing.