China rocked by series of flaws in state-owned enterprises

Posted on Nov 18, 2020 at 1:04 p.m.

The second largest bond market in the world has been rocked in recent days by a rare series of defaults from companies backed by the Chinese state. On Monday, a major semiconductor maker and a major automaker said they were unable to meet a repayment deadline, expanding the list of troubled state-owned (SOE) or semi-public enterprises.

Backed by the prestigious Tsinghua University, manufacturer Tsinghua Unigroup has long been seen as enjoying unwavering support from Beijing, receiving billions of yuan in public subsidies in recent years as China has made technological independence a priority. priority. But on Monday, Tsinghua Unigroup said it was unable to meet a bond maturity of 1.3 billion yuan (170 million euros). The same day, Brilliance Auto Group, public automobile giant and partner of BMW in China, announced to default on 6.5 billion yuan (230 million euros) of debt, citing “tight liquidity.” “


“More defaults are coming as Chinese authorities refocus on deleveraging public enterprises now that the worst of the pandemic has passed”, Chang Li, China specialist at S&P Global Ratings, said in a note released Tuesday. Last week, the brutal 1 billion yuan bond default by energy group Yongcheng Coal & Electricity, owned by Henan province, sparked a sell off on debt securities issued by Beijing-backed companies. In the week following Yongcheng’s non-payment, more than 20 billion yuan (2.5 billion euros) of planned bond issues were also canceled.

Until then, many investors in China assumed that Yongcheng’s debt, like that of most state-owned enterprises (SOEs), was safe because it enjoyed the unwavering support of Beijing or local governments. But this time, the Hunan authorities did not publicly promise to take over the bond liabilities of the local SOE. “The authorities authorize or tolerate these bond defaults with the aim of cleaning up the corporate market, 90% dominated by state enterprises, explains a specialist in Beijing. This domination has resulted in investors’ preference for paper issued by SOEs and a foreclosure of private issuers ”.

With the desire to purify the market and encourage investors to be more selective, the objective is also to gradually attract foreign investors who currently focus mainly on government bonds and bank bonds. . But this also supposes greater transparency and more in-depth work by Chinese rating agencies, one notes in Beijing. Yongcheng Coal & Electricity Bonds were rated AAA, the highest rating, last month!

Controlled increase in defects

Like Standard & Poor’s, JP Morgan anticipates an increase in defaults by Chinese state-owned companies in an economy gradually recovering from the Covid-19 epidemic. But there will be no ” shock therapy “, say the bank’s analysts, so as not to destabilize the economic recovery and the banking system. “Default rates are still low overall and are unlikely to result in systemic risk”, abounds S & P. ​​The bond default rate does not exceed 1.8% of outstanding loans issued, ie a level comparable to that of bank bad debts (NPL). While SOEs are also a factor of social stability and job maintenance, Beijing will undoubtedly take care to avoid an excessively sharp rise in defaults. “We have to clean the Augean stables but do it in a controlled manner”, observes an expert in Beijing.

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