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China economy

Beijing warns of ‘grim’ bond default risks as it orders local government checks

Authorities told to carry out assessments on likelihood of corporate defaults

PUBLISHED : Saturday, 30 December, 2017, 8:55pm
UPDATED : Saturday, 30 December, 2017, 11:00pm

China’s economic planning agency has asked local governments to check their corporate bond default risks as it forecast a challenging year ahead.

“In 2018, the overall pressure of repayment on corporate debt is still high, and credit risks in the bond market remain grim,” the National Development and Reform Commission (NDRC) said in a notice that was dated a month earlier but only published on Friday. “In particular, a few bond defaults have already generated negative impacts on regional financial ecosystems.”

China had a total of about 12 billion yuan (US$1.84 billion) in corporate bond defaults in 2017 – a significant drop from last year’s 40 billion yuan. At the same time, companies that failed to repay their debts this year were concentrated in particular areas, such as the northeastern rust-belt province Liaoning.

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It is not the first time that Beijing has ordered local authorities to carry out assessments on the likelihood of corporate bond defaults. But it comes after a series of bond defaults by some big Chinese companies hit the headlines on the mainland this year, and amid fears that the corporate debt burden on the economy will not improve any time soon.

Key aspects of the checks include whether bond issuers and underwriters have disclosed the required information and whether any change in the use of capital raised through bonds complies with regulations, according to NDRC notice.

The agency also asked local authorities to be “creative” about regulation and speed up developing a corporate bond management database that can monitor the performance of bonds online, issue warnings and provide solutions to make sure there are no systemic or regional financial risks.

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In the past few years, the government has encouraged companies to get financing from the bond market, which is considered relatively stable and safe compared with the more volatile stock market. But increasing financial regulation and deleveraging efforts have pushed up the cost of bond issuance.

During the first three quarters this year, bonds issued by non-financial companies totalled 5.1 trillion yuan, falling by 25 per cent from the same period in 2016.

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Meanwhile, low returns on investment have added to the risk of bond defaults by both state-owned and private enterprises.

Dandong Port Group – a company backed by the Dandong city government in Liaoning – which manages the largest Chinese port trading with North Korea, failed to settle 1 billion yuan worth of bonds that matured at the end of October. The default raised questions over its ability to honour a further 6.95 billion yuan worth of publicly traded bonds and bills, two-thirds of which will mature at the end of next year. In early December, the group formed a creditor’s committee with 15 financial institutes to find ways to offload its debt while keeping its business going.