China debt defaults stoke unease about ‘broader market contagion’
- Unexpected bond default of Yongcheng Coal has rocked investor confidence and stirred concern about domestic rating agencies
- Investors now fret about additional bond defaults from companies owned by cash-strapped local governments
A series of defaults on bonds issued by Chinese state-backed companies has sent shock waves through the world’s second largest debt market in recent days, raising questions about local government guarantees and the credibility of domestic ratings.
Since last week, China’s bond market has seen defaults by a mine operator, an integrated circuit maker and a car manufacturer.
The non-payments have rocked investor confidence as the bonds were issued by state-controlled firms, which are usually seen as less risky because they receive government backing and have investment grade credit ratings from domestic agencies.
The unexpected delinquencies triggered an immediate sell-off in outstanding debt issues on concern that financially weak provinces might be unable to continue offering guarantees to companies they own. This, in turn, has caused borrowers to halt or delay sales of new bonds.
The idea is that government guarantees behind a bank or a state-owned enterprise may not protect investors from losses after years of assuming that these guarantees were solid