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Caixin

China braces for multiple bond defaults at state-owned enterprises

Local governments urged to step up supervision of projects to lessen risk

Tsinghua Unigroup, a major government-backed player in China’s national push for self-reliance in semiconductors, defaulted on a 1.3 billion yuan bond on Monday after it failed to win approval from creditors for a rollover.   © Reuters

A series of bond defaults by Chinese state-owned enterprises (SOEs) is on the radar screen of the country's top economic planner.

At a routine press conference Tuesday, National Development and Reform Commission (NDRC) spokesperson Meng Wei called for local governments to step up supervision through project screening to prevent default risk for enterprise bonds.

Recent failures to repay debt by a coal mining company, a top Chinese chipmaker and a major car manufacturer highlighted the risk of rising defaults in China's corporate bond market. The number of defaults by China's SOEs is expected to rise marginally next year as the central bank shifts toward a more neutral policy stance amid an economic recovery, according to a Fitch report released Monday.

China's central bank pumped 800 billion yuan of liquidity into the money market Monday through its medium-term lending facility (MLF), helping to relieve some of the anxiety that's gripped institutions and investors after the recent bond defaults.

The most-recent defaults all involve corporate bonds traded in the interbank bond market, which is regulated by the central bank and the National Association of Financial Market Institutional Investors (NAFMII). The NDRC regulates enterprise bonds, almost exclusively issued by SOEs including local government financing vehicles (LGFVs).

While corporate bonds and enterprise bonds are both financing tools for SOEs, enterprise bonds usually have longer maturity, and the proceeds have to be used for specific projects. As of Monday, there were 2,575 outstanding enterprise bonds with a total face value of 2.25 trillion yuan ($343 billion), accounting for less than 6% of China's total bond market.

Overall, risk prevention for enterprise bonds has been relatively good and there has been no default this year, Meng said. The cumulative default rate of enterprise bonds is at the lowest level among corporate debts, she said.

Usually if a bond issuer has both corporate and enterprise bonds, it treats enterprise bonds more cautiously, said a partner at a private bond fund. But if a default occurs, all debts are treated equally under law, the partner said.

Last week, state-owned Yongcheng Coal and Electricity Holding Group Co. Ltd. defaulted a 1 billion yuan ultra-short-term bond, setting off a chain reaction that spread to other coal mining companies and local government financing vehicles in other provinces. Brilliance Auto Group Holdings Co., a Chinese automaker linked to BMW AG, also defaulted on 6.5 billion yuan ($987 million) of debt.

Tsinghua Unigroup, a major government-backed player in China's national push for self-reliance in semiconductors, defaulted on a 1.3 billion yuan bond Monday after it failed to win approval from creditors for a rollover.

Investor appetite for debt from weaker SOEs is likely to ebb as market liquidity tightens, a trend that Yongcheng's surprise default may accelerate, Fitch said. Before the Yongcheng default, five SOEs failed to repay debt from January through October, close to levels seen in the previous two years, according to Fitch.

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Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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