Analyst says China’s central bank could intervene after state-firm bond defaults
Series of defaults by Chinese SOEs could revitalize the market in the long term
Defaults on bonds of Chinese state-owned companies will continue in the new year, but this will play a positive role in the long term, as zombie companies (enterprises that need constant financial injections in order to continue their activities) will begin to disappear from the market, experts say..
Investors generally regard state-owned companies as a safe bet, given «hidden guarantee», that the Chinese authorities will save those who face financial problems. but a number of defaults in recent weeks, including by high-rated market participants, refute this assumption.
Some loud state-owned companies that recently defaulted on paying off their debts include mining Yongcheng Coal and Electricity, chip makers Tsinghua Unigroup and Huachen Automotive Group.
«Market participants were reminded once again that not all state-owned enterprises feel the same and are in an equal position.», – say analysts at research firm CreditSights.
«As the wave of defaults has shown, government support is selective and the Chinese government is generally more tolerant of defaults. State-owned enterprises that do not operate in strategically important industries or have moved away from the main business cannot be saved by the state», – they added.
Yongcheng Coal and Electricity’s default surprised many investors given its rating «AAA» from the National Agency. But this company is «a typical example of a large risky organization».
People’s Bank of China warned in his financial stability report that the problems of some large companies could pose a risk to the entire economy. Among them, aggressive expansion into various industries and regions is indicated, where debts are accumulating that exceed the solvency of companies. Corporate governance issues such as complex debt chains within a group of companies, hidden intra-group transactions and inaccurate disclosures. Reliance on borrowing to pay off debts.
«Perhaps these issues are related to the collapse of Yongcheng Coal and Electricity», – Jefferies analysts said.
While the defaults of large government-linked companies hurt sentiment in the short term, they will benefit banks and investors for the foreseeable future.. For credit institutions screening out problem participants allows you to identify risks at an early stage and determine «quality» collateral for these risks.
CreditSights explained that the permission «problem actors» going to the bottom will free up resources, contribute to the renewal «great economic dynamics» in China by reducing the number of zombie companies.
After a recent string of defaults, Chinese authorities have pledged to seriously crack down on misconduct among bond issuers.
«This is not the first time that defaults are a concern. Ultimately, we are confident that China has the political will and is able to bring the market back on track.», – count in CreditSights.
Fitch Ratings said in its report last week that the number of defaults by SOEs may «grow slightly» in 2021 year against the backdrop of a likely tightening of financing conditions in China.