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China allows biggest corporate bond default yet amid market role
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CHINA allowed the country’s biggest corporate bond default yet yesterday in a fresh sign of wrenching economic change as growth slows and market forces are given a bigger role in its financial system.
The default by China Shanshui Cement Group, a major cement producer, highlights the decline of once-dominant heavy industry as China tries to shift from growth based on trade and investment to a consumer-driven economy.
Jinan-headquartered Shanshui cannot repay any of a 2 billion yuan (US$314 million) note due yesterday, said a man who answered the phone in its investor relations department.
“The company has no money to pay investors,” said the man, who refused to give his name.
On Wednesday, Shanshui asked a court in the Cayman Islands, where it is incorporated, to appoint a liquidator to wind down its operations.
Until last year, the government bailed out troubled borrowers to preserve investor confidence. But China allowed its first bond default last year in a bid to make its financial system more market-oriented.
That shift in attitude “will obviously lead to more default cases,” said Ivan Chung, who is in charge of China credit research for Moody’s Investors Service.
Earlier official efforts to stave off defaults by other borrowers with loans from state banks or other aid prompted complaints Chinese authorities were wasting money. The implicit guarantee meant interest rates failed to reflect default risks, a key function of bond markets.
The most vulnerable companies are in fields like steel, mining, solar equipment and other sectors where debts are high and supply exceeds demand, Chung said.
“Private enterprises with poor corporate governance will be vulnerable too because it will be difficult to hide their weaknesses and problems in a down cycle,” he said.
Until now, real estate developers and other private firms have been able to issue debt at interest rates almost as low as that paid by government-linked entities that face little likelihood of default.
“The market appears to be grossly mispricing risks,” Bank of American Merrill Lynch said in a report last month.
The first default in March 2014 was by a private sector solar panel manufacturer, Chaori Solar Energy Science and Technology Co.
In January, developer Kaisa Group Holdings Ltd became the first Chinese company to default on offshore debt when it missed a US$23 million interest payment. In April, a manufacturer of power equipment, Baoding Tianwei Group Co, became the first state-owned defaulter when it failed to make an 85.5 million yuan payment to creditors.
Defaults still are low in a 40 trillion yuan Chinese bond market with some 3,000 issuers, said Chung. He said about a third of that is corporate debt.
China has yet to allow a default by a major government company, despite a reform plan issued in September that calls for state enterprises to become financially independent.
SinoSteel Corp, a steel producer that is part of the top tier of state companies owned by the central government, was due to miss a September 22 interest payment on 2 billion yuan in debt. Hong Kong news reports said the economic planning agency intervened and told investors to wait until next Monday to be repaid.
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