Chinese bondholders reportedly threaten to sanction Liaoning province for unpaid debt

Chinese bondholders are threatening to impose sweeping financial sanctions against a Chinese province because a steel plant it government own has failed to honour its debt, Caixin magazine reported, citing an internal draft of the bondholders.

While Chinese authorities are unlikely to endorse any broad-based boycott of bonds from a specific province, the reported proposal – a rare drama in China’s opaque debt world – reflects an intensifying turf war between local governments and financial institutions over who should bear the brunt of soured debts accumulated by China’s zombie industrial behemoths, analysts said.

“Fights between debtors and creditors are likely to grow in China where defaults are on the rise,” said Ding Shuang, chief China economist at Standard Chartered in Hong Kong. “Bank creditors are already under heavy pressure and they are unwilling to accept big haircuts… but at the end of the day, both sides have to sit down to find solutions.”

Dongbei Special Steel, a struggling steelmaker owned by the Liaoning government, has defaulted on six batches of debt worth about 4 billion yuan (HK$4.6 billion) since the first default in March this year after the company’s former chairman hanged himself. But the government of Liaoning, a province is grappling with economic recession and rising debt, has yet to provide a debt restructuring plan to the satisfaction of bondholders.

According to Caixin, bondholders are getting increasingly frustrated with the slow progress and fear that the Liaoning government may force them to accept a debt-to-equity plan to change their debt into shareholding rights in the steelmaker.