Markets shiver as big Chinese state-owned firms defaulting on their debts

Business & Technology

Large state-owned firms have been defaulting on their bonds, spooking Chinese investors.

Yongcheng, Henan province, is somewhat famous for its enormous statues. Now it’s better known to others as the home of Yongcheng Coal and Electricity Holding Group, which just defaulted on $152 million of debt.

Foreign investors hold less than 1% of China’s outstanding corporate debt, but bonds issued by established state-owned enterprises (SOEs) have long been seen as a safe bet by many Chinese investors who have believed that the government will always bail out large state firms if they run into trouble.

But that confidence has been shaken by a handful of recent defaults by large SOEs, particularly these three:

  • Tsinghua Unigroup, a silicon chipmaker with government backing, defaulted on a $198 million bond on November 16.
  • Yongcheng Coal and Electricity Holding Group in Henan Province failed to pay $152 million of debt back to bondholders on November 10.
  • Huachen Automotive Group Holding Co, BMW’s main Chinese joint-venture partner, was unable to pay a $149 million bond that matured on October 23.

The fallout

  • “The defaults have angered investors, who say their faith in the firms’ top-notch ratings, seemingly sound finances and implicit state backing has been violated,” says Reuters.
  • “The developments have rattled China’s nearly $4 trillion corporate debt market, of which state-owned enterprises are estimated to account for more than half,” notes the Financial Times.
  • Bonds with AAA ratings such as Pingdingshan Tianan Coal Mining Co., Jizhong Energy Group, Tianjin TEDA Investment Holding Co., and Yunnan Health & Culture Tourism Holding Group “have fared much worse than others as investors clamber to avoid the next potential blowup,” according to Bloomberg.

The bottom line: According to the Reuters piece, “the notable lack of state support for struggling state-owned enterprises (SOEs) suggests Beijing now has more confidence in the economy’s ability to absorb such failures,” even if bondholders were “caught off guard.”  

Meanwhile, spooked investors are “waiting to see how far regulators are prepared to bear down on the market, given the risk of repercussions for the wider financial system,” according to the FT (linked above).  

Aside from fears of a financial collapse of some kind, the government has another problem to worry about when it comes to large SOEs defaulting: popular perception that the real problem is corruption. Some of top social media comments on the case of Yongcheng Coal and Electricity express sentiments like this (in Chinese):  

  • “The leaders’ wallets are stuffed with money, and the people pay the bills in the end.”
  • “Of course they’re going to take our taxpayers’ money to pay the debt.”

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