ArrowArtboardCreated with Sketch.Title ChevronCrossEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
Banking & Finance

Trust product troubles ripple through Chinese markets

 SHANGHAI -- Concerns over potential defaults on high-yield financial products are making Chinese companies put some debt issues on hold due to wary investors, as well as posing a potential new risk to the global economy.

     Since January, nine companies have postponed or canceled issuance plans for a total of 5.75 billion yuan ($948.24 million) in bonds and commercial paper, equivalent to about 2% of the debt issued over the period.

     This is most pronounced among privately operated companies, whose lack of government backing has meant less interest from potential investors than hoped.

     Demand has been dulled by worries over defaults on so-called wealth management products, a feature of China's shadow banking system.

     Broader credit risks have driven interest rates up, and the gap between corporate debt and more-creditworthy government bonds is widening. Average yields on AA-rated seven-year corporate bonds reached 8.44% in mid-January.

     So even if companies offer bonds, they will be unable to raise money if they cannot pay these higher rates.

Coal companies feeding the fire

Repayments were not made on a wealth management product created by Jilin Province Trust, Chinese newspapers reported Wednesday. Of the outstanding balance of 972.4 million yuan, 763.4 million yuan has come due and not yet been repaid. The remainder matures this month and in March.

     The funds raised were invested in Shanxi Liansheng Energy, a privately operated coal-mining company that faced a cash crunch when China's coal bubble burst and prices plunged.

     Shanxi Liansheng is effectively bankrupt, making investment stakes unrecoverable. But it has signed a strategic restructuring proposal with the Shanxi provincial government, sparking expectations of a bailout and taking some of the heat off for now.

     Another product, investing in a different Shanxi coal-mining company, narrowly avoided default in late January. A "third party" bought the product and repaid the principal in a move believed to have been orchestrated by authorities.

     Despite all this, outstanding wealth management products sold through banks alone still stand at 9.9 trillion yuan. Whether all be repaid on time is unclear.

     The central role of regional coal-mining outfits has been shaped by shifts in the Chinese economy. The country's rapid growth required massive investments, but banks refused to lend, leading to the flow of funds through wealth management products.

     The economic slowdown then cooled demand for coal used in electricity and steel production. Combined with tighter environmental regulations, this put a squeeze on coal companies in particular.

Fears of global repercussions

"A default may occur in the first half of this year," says Chen Li, a strategist at UBS Securities -- and a growing portion of the market agrees.

     While the government may intervene to keep principal safe, financial instability in China, the biggest export destination for Asia's emerging markets, could pose a risk to the global economy.

     The Nikkei Stock Average dropped 1.79%, or 265.32 points, on Thursday to 14,534.74. Several factors are contributing to this correction, but late repayments are one of them. Investor risk aversion, which had receded, is once again strengthening.

     "There's a possibility that the Chinese government will step in to keep the negative impact from spreading," says Hiromichi Tamura, chief strategist at Nomura Securities, "but if these types of repayment delays continue, they could trigger a global stock market downturn."

(Nikkei)

 

 

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends January 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media