Banking & Finance

Tianjin government-backed property firm may default as China’s deleveraging campaign reaches state-owned sector

Tianjin Real Estate Group fails to issue repayment plan, prompting a warning to investors by China Citic Trust

PUBLISHED : Monday, 14 May, 2018, 6:23pm
UPDATED : Monday, 14 May, 2018, 10:57pm

Tianjin Real Estate Group, a developer backed by the Tianjin government, could default on a 550 million yuan (US$86.7 million) trust product, in a sign that Beijing’s deleveraging campaign is affecting state-owned enterprises as well.

Tianjin Real Estate, which is controlled by the local state asset supervision and administration commission, was due to pay back part of a trust product for principal and interest worth more than 200 million yuan on May 18. But the company did not submit a plan for repayment by May 10, which prompted the trust product manager, China Citic Trust, to issue a notice on Friday warning investors about default risks.

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Investors sold corporate bonds under Tianjin Real Estate afterwards, sending bond yields up to 34.8 per cent on Friday afternoon. China Citic Trust, however, posted another announcement in a few hours, saying Tianjin Real Estate had made assurances about the repayment but did not elaborate.

The trust product has raised more than 550 million yuan. Tianjin Real Estate is indebted to dozens of financial institutions, with an outstanding loan of more than 108.2 billion yuan, China Business News reported on Sunday.

“China has already allowed some state-owned enterprises to default in the past few years, as the central government seeks to establish market discipline and break ‘implicit guarantees’ that distort prices,” said Iris Pang, Greater China economist at ING in Hong Kong.

“But the Tianjin government still has motivation to step in and help with the funding of the firm, if its default downgrades the credit profile of the municipal government,” she added.

Calls to China Citic Trust went unanswered on Monday.

More than a dozen private companies have defaulted so far this year. Alternative financing channels have narrowed as China moves to cut debt and build a culture of more disciplined bank lending, making it increasingly difficult for some companies that depend on this sector for liquidity and refinancing to source credit. Investors will have to brace for more jitters in the credit market, said analysts.

More than 10 companies, mostly privately owned and from a variety of industries, have defaulted on 15 bonds worth more than 12.8 billion yuan, according to figures from China Central Depository and Clearing Company, which manages and promotes the sector.

“Default rates are rising [in China] because weaker companies are having trouble refinancing amid stricter financial regulation,” S&P Global Ratings said in a report released on Monday.

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“The Chinese government’s financial deleveraging campaign has led banks to unwind off-balance-sheet funding that some companies have relied on to finance aggressive business expansion in the past several years,” said Christopher Lee, an S&P analyst.

In April, the Chinese central bank lowered banks’ required reserve ratio to release liquidity into the financial system, but analysts from S&P said they expect administrative tightening to continue.