China's Goverment is allowing Private and State Owned Companies to Default
Chinese authorities are standing by while more and more companies are begining to renege on their debts. In the past they would have found ways to engineer bailouts. The shift comes as Chinese growth slows to multidecade lows. The on going trade wars have slowed China's economy and put massive pressure on shakier companies after years of rampant corporate borrowing.
This week Tewoo Group Co., a commodity trader owned by the municipal government of the northern city of Tianjin, completed a debt swap with holders of four dollar bonds totaling $1.25 billion. Investors could pot to receive between 37 cents to 66.7 cents on the dollar in cash for their bonds, or swap them for new securities that pay lower interest. It is the first offshore default by a state-owned enterprise in 20 years.
Peking University Founder Group, a conglomerate majority owned by one of Beijing’s top universities, failed to repay some yuan bondholders on time. It has until Tuesday to make creditors whole, or trigger defaults on its roughly $3 billion of dollar debt.
“Issuers have realized that they do not need to pay offshore creditors back anymore,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.
Mr. Gallimore’s research shows that as of Dec. 10, some $56.7 billion of Chinese corporate dollar bonds were trading at yields of over 11% (levels that signal financial stress). About 87% of that total dollar amount was issued by private firms.
“The Chinese government will be more selective in bailing out state companies,” given slowing growth and local governments’ weakening finances, said Iris Pang, Greater China economist at ING Wholesale Banking.
“Definitions are highly subjective and vary,” said Mr. Gallimore at ANZ. He said the market was concerned that changing classifications could be accompanied by defaults.
In February, Qinghai Provincial Investment Group Co., a company controlled by the province’s state-asset administrator, was late in paying offshore creditors.
By the time it made the payment a few days later, some investors had called it the first Chinese offshore SOE default since the collapse of Guangdong International Trust and Investment Co., or Gitic, in the late 1990s.
One high-profile private borrower, textile and clothing conglomerate Shandong Ruyi Technology Group, is due to repay $345 million of dollar bonds on Dec. 19. That debt is trading at less than half of face value and Moody’s Investors Service this week cut the firm’s credit rating deeper into junk territory, citing “heightened refinancing risk.”