SHANGHAI/BEIJING (Financial Times) -- A Chinese state-owned enterprise from the country's remote north-west has failed to repay a US dollar bond in Hong Kong, the first offshore default in 20 years and the latest sign investors can no longer rely on Chinese authorities to bail out state groups.
A slowing Chinese economy and tight funding conditions for weak borrowers -- despite broader monetary easing in recent months by China's central bank -- are leading to more defaults in both the onshore renminbi and offshore dollar markets.
Various privately owned Chinese issuers have defaulted on offshore dollar bonds in recent years, including three so far this year. But while state-owned enterprises have occasionally defaulted on onshore bonds since 2015, offshore investors have still largely assumed that local governments would backstop their corporate entities.
Qinghai Provincial Investment Group defaulted on a $10.9m interest payment due on the Hong Kong note on Friday, then missed a separate principal and interest payment on a Rmb20m ($3m) onshore renminbi bond that matured on Monday, according to Caixin, a respected business news website.
Located on the mountainous Tibetan plateau, sparsely populated Qinghai is one of China's poorest provinces. Qinghai Provincial, whose main businesses are aluminium and hydroelectric power, has an additional $1bn combined in onshore and offshore bonds maturing between next year and 2022, according to Refinitiv data. S&P rates the company at B+, four notches below investment grade.
In a statement on Tuesday, Qinghai Provincial said it had missed the onshore bond payment on Monday afternoon "due to technical reasons" but had completed payment by Monday evening. The statement did not address the offshore bond. The company did not respond to a request for comment on Tuesday.
Despite the reported default, Qinghai Provincial's defaulted dollar bond was quoted at a relatively modest discount of 82 cents on the dollar on Tuesday, according to Refinitiv data.
"From a financial standpoint these guys are always not that strong on a standalone basis. But the province is of political significance," said a high-yield bond underwriter at a European bank in Hong Kong. "The current prices indicate that the market thinks there's a high probability that this is resolved."
Local media previously reported that help from the Qinghai government enabled Qinghai Provincial to narrowly avoid two defaults on maturing bonds last year.
Last year, the government of western China's Xinjiang region helped repay an onshore bond by a provincially owned vehicle a few days after defaulting.
The last SOE to default on an offshore dollar bond was Guangdong International Trust and Investment Company, which collapsed in 1998. In Gitic's case, the investment arm of Guangdong province -- the cradle of Deng Xiaoping's pro-market economic reforms -- had borrowed heavily in dollar debt and was caught out when US interest rates rose.
Today US dollar borrowing by Chinese companies is much larger, with around $198bn currently outstanding, according to Refinitiv data. Some analysts warn that other bond issuers could come under pressure due to the slowing economy, especially if the renminbi weakens, making it costlier to repay dollar debt using renminbi revenue.
"This time it's different; this time it's much bigger," said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets in Hong Kong. "At the time of Gitic 20 years ago, the US dollar debt was much smaller and more manageable."