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Politics

China vows to guard financial stability after big-name defaults

State-backed companies account for 40% of total this year

Semiconductor manufacturer Tsinghua Unigroup is at the center of President Xi Jinping's push to lessen China’s reliance on U.S. technology.   © Getty Images

SHANGHAI -- China has pledged to step up monitoring of financial misconduct to ensure system stability after a series of high-profile defaults by state-backed companies sent shock waves across the country. 

China's corporate defaults have reached 157 billion yuan ($23.9 billion) so far this year and are on track to surpass last year's record 167 billion yuan. State-owned companies, including miner Yongcheng Coal & Electricity Holding Group, chipmaker Tsinghua Unigroup and Huachen Automotive Group Holdings, account for 40% of the total.

A State Council committee on financial stability chaired by Vice Premier Liu He held an emergency meeting on Saturday, and promised action to "avoid a financial system crisis," calling for "zero tolerance" for corporate misconduct.

This year's default problem has been particularly unnerving to investors in that state-backed companies figure prominently in the trend. Corporate finances deteriorated quickly after China pulled back the financial support extended as part of pandemic-related economic stimulus. Beijing is now determined to prevent any instability.

The committee found that a confluence of factors, such as the economic cycle, the economic system and corporate behavior, contributed to the recent surge in defaults.

"Fraudulent issuance, disclosure of false information, malicious transfer of assets, and misappropriation of issuance funds will be strictly investigated," the committee said in a statement. 

Qi Kai, vice president of Huachen Automotive, denied the company's impending doom just four hours before its filing for bankruptcy restructuring on Friday. "I never heard of the decision, and all business goes on as usual," he told local media.

BMW's partner in China failed to make a 1 billion yuan bond repayment in October. While its joint venture with BMW remains strong, Huachen lagged behind in restructuring, counting on the government to step in for help. It is likely to default on the upcoming 16 billion yuan bond redemption. 

Tsinghua Unigroup, controlled by China's most prestigious engineering school, Tsinghua University, failed to make good on a 1.3 billion yuan bond redemption earlier this month. The financial trouble at a company central to President Xi Jinping's push for a homegrown chip industry sent jitters through the market.

China's corporate default problem this year is different in that a large number of state-backed companies are failing to meet obligations. 

Earlier this year, Beijing instructed banks to give companies a moratorium on principal and interest payments as part of economic stimulus measures amid the coronavirus pandemic. But their financial trouble became evident after an economic recovery prompted the government to withdraw support. 

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