China’s first state company defaults

Published Apr 22, 2015

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Bloomberg Beijing

A Chinese power transformer maker has become the country’s first state-owned company to default on an onshore bond, flagging the government’s rising tolerance for non-payments as it allows market forces to play a bigger role.

Baoding Tianwei, the unit of central government-owned China South Industries, said it would fail to pay bond interest due yesterday, according to a statement posted to Chinamoney.com.cn, the China Foreign Exchange Trade System website. It will continue to raise payment funds via various means including asset disposal.

Premier Li Keqiang, since he took office in March 2013, has pledged to open Asia’s biggest economy to market forces and strip power from the government. While only privately owned firms had previously defaulted in China’s domestic bond market – Cloud Live Technology earlier this month and Shanghai Chaori Solar Energy Science & Technology last year – most issuers are state-backed companies.

“In the long term, the default risks of Chinese companies are rising,” Liu Dongliang, a senior analyst at China Merchants Bank in Shanghai, said ahead of Tianwei’s announcement. “But the isolated cases won’t cause a systematic fallout.”

Baoding Tianwei’s 1.5 billion yuan (R2.96bn) of 5.7 percent notes due April 2016 have dropped 7.1 percent since March 31 to 85.3 percent of par as of Monday, set for the sharpest monthly decline since they were issued in 2011.

According to an April 14 statement, the company had to repay 85.5 million yuan of interest on the notes. The bonds’ rating is now B versus AA+ at issuance, according to yesterday’s statement.

Weakest pace

Among outstanding notes issued by Chinese companies, 91 percent are from government-backed enterprises, while just 6 percent are sold by privately owned firms, according to data.

China’s economy expanded at the weakest pace since 2009 last quarter, with output, investment and retail data pointing to a deepening slowdown, data released by the statistics bureau in Beijing on April 15 showed. On Sunday, the central bank cut the reserve requirement ratio for banks by 1 percentage point.

China’s corporate debt was the highest in the world, former central bank adviser Yu Yongding wrote in the official China Daily last week. Companies had $14.2 trillion (R171.3 trillion) in debt at the end of 2013, exceeding every other country including the US, which had $13.1 trillion in company obligations.

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