Chinese investment giant CMIG misses bond payment, sending shockwaves through US$11 trillion market

An investment giant backed by dozens of the biggest Chinese firms and dubbed the “the aircraft carrier of China’s private companies” by local media has partly suspended trading of its bonds after missing a repayment. The case underlines the mounting pressure in the country’s US$11 trillion bond market, said analysts, as a liquidity crunch forces an increasing number of heavily indebted companies to the brink of default. China Minsheng Investment Group (CMIG) has stopped taking bids for three of its bonds “due to recent price volatilities”, according to a filing issued on Tuesday morning through the Shanghai Stock Exchange. One of the three bonds had plunged by more than 27 per cent on Monday, as investors sold off amid concerns about CMIG’s financial condition. China’s corporate default storm continues to rage at the start of 2019 after a record year The company missed a deadline on January 29 to pay back a privately placed bond, worth 3 billion yuan (US$442 million). Some of the investors still have not received their money, and CMIG has been negotiating with them for a repayment extension, sources said. CMIG has yet to clarify the situation, and was not available for comment when contacted by the Post. The company faces more than 10 billion yuan in payments for maturing debts and interest this year, according to data provider WIND. It had assets worth as much as 310.9 billion yuan as of the end of last September, its third-quarter report showed. But its net profit plunged by nearly 60 per cent to just 1.6 billion yuan. In recent filings CMIG has been alerting investors to risks stemming from cash-flow stress caused by earlier mergers and acquisitions, and an underperformance in the solar energy sector, in which it is heavily invested. “Three billion yuan is a very small amount of money for a company like CMIG. The delay in repayment shows they have bigger problems to deal with,” said Wonnie Chu, managing director of fixed income at GaoTeng Global Asset Management. She said the Chinese government is becoming more tolerant of bankruptcies and defaults by companies “as long as it does not create systemic risks”. “There was a time when China tended to bail out all the defaults, but it is not the case since the supply-side reform, when Beijing emphasised ‘quality growth’,” Chu added. Caught in China’s cash crunch: why private companies are collapsing into a black hole of shadowy debt The crisis facing CMIG is widely shared by other Chinese private companies, said Ivan Chung, head of Greater China credit research and analysis at Moody’s Investors Service. “Late repayment shows the financial condition of a company is stretched. Experience since last year shows some companies have tended to default, even if they could manage to make delayed repayments when the crisis first emerged,” he said. “Although the central bank has been pumping liquidity in the past few months, banks are becoming cautious. Many would rather lend to state companies than private firms. “When investors know that the issuers’ credit line is being cut by the banks, these companies can hardly refinance and tend to default on their bonds.” Easy credit has fuelled aggressive fundraising and investment by Chinese companies in the past few years, but many of them are facing a liquidity crunch since last year after Beijing launched a campaign to reduce debts and avoid systemic risk. The situation has been worsened by the continuing tussle with the United States over trade, which has shattered confidence in the economic outlook and made lenders cautious about extending more credit. The number of corporate bond default cases surged to 119 in 2018, more than triple the 35 cases a year earlier. The value of defaulted bonds also tripled to 116.6 billion yuan (US$16.95 million) in 2018 from 33.7 billion yuan (US$4.90 million) in 2017, according to the data compiled by Wind. CMIG was set up in 2014 by Chinese veteran banker Dong Wenbiao. Dong, former chairman of China’s biggest private lender, Minsheng Bank, managed to persuade 59 of the biggest private companies to make initial investments in the company. The combined assets of those firms surpassed 1 trillion yuan at the time. The ambition of CMIG was to make investments in strategic industries, with the backing of the country’s strongest entrepreneurs. However, rumours have surfaced occasionally that Dong has been under investigation by China’s anti-corruption authority since early 2015, before he stepped down from the post as chairman of the group in October, 2018.