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Banking & Finance

New worries threaten Chinese corporate bond market

HONG KONG -- Financial market risks are escalating in China, with bond default concerns hounding yet another company.

     Investor sentiment in the Shanghai stock market and elsewhere went quickly downhill Wednesday. But Chinese authorities have taken a business-as-usual stance, in contrast to anxiety within the financial markets.

     Market concern is growing about financial woes at Baoding Tianwei Baobian Electric, a member of state-run Baoding Tianwei Group. This comes less than a week after solar panel giant Shanghai Chaori Solar Energy Science & Technology failed to complete a bond payment, marking the first default of a publicly offered corporate bond in China.

     Baoding Tianwei Baobian, a Shanghai Stock Exchange-listed manufacturer of transformers, reported Tuesday a net loss of 5.2 billion yuan ($846 million) for the year ended Dec. 31. This follows a 1.5 billion yuan loss in fiscal 2012, putting the company at risk of a delisting according to exchange rules.

     The stock resumed trading Wednesday, following a suspension Tuesday, sinking 0.23 yuan, or 5.1% from Monday, to a limit-down level of 4.29 yuan.

     The company attributes its eroded earnings to worsening profit in the renewable energy sector -- much like Shanghai Chaori, which took a big hit from tumbling panel prices resulting from an oversupply. The companies also share the distinction of being bond issuers.

     In 2011, Baoding Tianwei Baobian issued 1.6 billion yuan in 5.75% seven-year bonds. The issue is listed on the Shanghai exchange, but its trading was suspended indefinitely from Tuesday.

     This effectively represents a delisting of the bond. The company said Tuesday that the bond no longer meets collateral requirements for repo transactions, urging market caution.

     For now, it remains uncertain whether the company will default on the bond. The next interest payment -- due July 11 -- is a while away, and the company still has room to recover earnings. Baoding Tianwei Baobian says it will withdraw from the renewable energy sector to focus on its mainstay transformer operations. Backed by its solid state-run parent, Baoding Tianwei Baobian could benefit from a bailout as a last resort.

     A bond or trust product default is unlike a default by a financial institution with complex ties to many companies, says Bank of America Merrill Lynch economist Ting Lu, who contends that the former will not trigger systemic risk.

     But investors are nonetheless anxious about the market outlook. With Chinese authorities essentially allowing the bond default by Shanghai Chaori, some market observers warn China may be approaching its own "Bear Stearns moment", referring to the U.S. investment bank and brokerage's failure in 2008, which kicked off American financial market woes, culminating in the Lehman shock.

     Rising concern about China is also spilling over into other markets. International copper prices have tanked on speculation about a credit crunch in China. Deleveraging efforts by China are also a concern.

     Even though Lu does not anticipate a Chinese credit crunch or hard landing, he warns that the financial markets may become extremely unstable this year. The market rang in the Chinese New Year just last month, but already faces a rough start.

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