Chinese state-firm debt defaults trigger market selloff, fears of crisis

But the recent delinquencies by Yongcheng Coal & Electricity Holding Group Co and other government-owned bodies triggered a selloff this week in debt issued by state firms, raising fears of a brewing credit crisis. "Once the credit environment is destroyed, it's very difficult to rebuild confidence," wrote Qu Qing, an analyst at Jianghai Securities, highlighting a risk that investors will desert credit bonds for Chinese government bonds and policy bank bonds if the situation deteriorates.

Chinese banks and fund managers dumped their holdings of riskier corporate bonds on Friday after a series of defaults by top-rated state-owned enterprises (SOEs) sent shockwaves through the mainland corporate bond market.

As lower-rated bond yields rose, analysts speculated the defaults suggested authorities were going back to cleaning up excessive debt build-up in an economy emerging from the coronavirus pandemic. A Chinese miner that defaulted this week meanwhile canceled Friday’s investor meeting for fear it would turn chaotic after too many creditors showed up.

Investors have traditionally seen bonds issued by state-owned firms as less risky due to their perceived government backing. But the recent delinquencies by Yongcheng Coal & Electricity Holding Group Co and other government-owned bodies triggered a selloff this week in debt issued by state firms, raising fears of a brewing credit crisis.

"Once the credit environment is destroyed, it's very difficult to rebuild confidence," wrote Qu Qing, an analyst at Jianghai Securities, highlighting a risk that investors will desert credit bonds for Chinese government bonds and policy bank bonds if the situation deteriorates. The nervousness also spilled into the stock market, where Chinese banking shares fell on Friday over concerns they would face increased bad loans.

Investor flight from the credit market could push up financing costs and squeeze corporate funding in an economy that is just recovering from the pandemic-induced slump. Executives from Yongcheng Coal's state parent, Henan Energy and Chemical Industry Group, were set to hold a meeting with major creditor banks in Henan province on Friday.

But the meeting was canceled after too many creditors attended, raising fears of chaos, said three people with knowledge of the situation. Creditors are keen to get their money back, after the coal miner on Nov. 10 said it failed to make principal and interest payments on 1 billion yuan ($151 million) in commercial paper.

DEBT WOES The fresh default comes on the heels of debt woes at Chinese property developer Evergrande, which is Asia's largest junk bond issuer, and a default by Huachen Automotive Group, the state-backed parent of BMW's Chinese venture partner.

Investors also dumped bonds by state-backed integrated circuit maker Tsinghua Unigroup Ltd this week following a debt warning from a rating agency. With debt running at three times GDP, Chinese debt markets are prone to let off steam but this is the first time since mid-2019 when regulators took over Baoshang Bank that credit stresses have shown up.

Interest rates on corporate bonds had already been creeping up as investors brace for the central bank and state banks to remove the largesse doled out during the coronavirus pandemic. Huachen's bond prices tumbled to around 10 yuan, a tenth of face value, on Thursday. Unigroup's bond prices slumped and the Shanghai Stock Exchange paused trading in some of the company's debt, while shares of its listed unit dropped 10% on Friday.

A number of bond sales have been canceled over the past few days, while banks have raised the bar for corporate bonds to be used as collateral, traders and a regulatory source said. "In the short term, we do not rule out the possibility that credit risk will spread further, deepening market anxiety," wrote Liu Wanjun, fund manager at China Asset Management Co.

In an apparent attempt to ease market nerves, China's central bank injected a net 160 billion yuan into the banking system via open market operations on Friday. But traders remain jittery. "Market sentiment is really bad this morning. Everyone is so worried that it would evolve into a credit crisis," a bond trader at a Chinese bank said.

A currency trader said there was spillover into the forex market as well, with short-end yuan swap points climbing. "The market now expects the central bank to just inject more cash to soothe market sentiment."

($1=6.6217 yuan)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)