China corporate debt defaults trigger concerns of broader crisis

A Chinese mining firm that defaulted on its debts this week held an emergency creditors’ meeting on Friday to address potentially “huge credit risks”, as a series of defaults by top-rated state-owned enterprises (SOEs) sent shockwaves through China’s corporate bond market.

Investors have traditionally seen bonds issued by state-owned firms as less risky due to their perceived government backing. But the recent delinquencies triggered a selloff in debt issued by state firms in impoverished provinces, 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 corporate bonds for the perceived safety of 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 concerns they would face increased bad loans.

Shares of Industrial Bank Co. and China Everbright Bank Co. fell more than 3.4 percent on Friday. An index tracking stocks of state-owned enterprises lost 0.8 percent, its fourth day of losses.

Meanwhile, the SSE 50 Index of Shanghai’s largest stocks slumped as much as 2.3 percent on Friday, led by banks and insurers.

There has been a resurgence of credit stress in recent months as several high-profile firms come under financial strain amid the global pandemic.

Fears of a credit crunch at China Evergrande Group rippled through the Asian market, while provincial authorities pushed for a court-led restructuring to resolve debt woes at a state-run automaker linked to BMW AG earlier this month.

Executives from the state parent of mine operator Yongcheng Coal & Electricity Holding Group Co met major creditor banks in Henan province on Friday.

Local officials from China’s central bank and banking and state asset regulators were also present, according to a notice seen by the Reuters news agency and state media.

The meeting is taking place three days after the coal miner failed to make principal and interest payments on 1 billion yuan ($151m) in commercial debt.

Investor jitters

News of the meeting did little to ease investor concerns, as credit woes at a slew of state borrowers, including integrated circuit maker Tsinghua Unigroup Ltd and carmaker Huachen Automotive Group, raised regulatory eyebrows and triggered panic-selling in some corners of the bond market.

Huachen’s bond prices tumbled to around 10 yuan, a tenth of their face value. 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 percent on Friday.

A number of bond sales have been cancelled over the past few days, while banks have raised the bar for corporate bonds to be used as collateral, traders and a regulatory source told Reuters.

In an apparent attempt to ease market nerves, China’s central bank injected a net 160 billion yuan ($24.2bn) 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 the jitters also spilled over into the foreign exchange market.

“The market now expects the central bank to just inject more cash to soothe market sentiment,” the bond trader said.

China’s $45 trillion banking industry has suffered its worst profit slump in more than 10 years after being put on the front-line in helping millions of struggling businesses hurt by the pandemic.

As part of the response, China has allowed many borrowers to delay interest and principal payments to March next year, which is hiding the true sense of the bad debt bulge.

The industry’s non-performing loans climbed to a record 2.84 trillion yuan ($429bn) as of September 30, according to China’s banking regulator.