For the first time, China allowed a state-owned company to default on bond interest payments Tuesday, sparking investor fears that slowing economic growth could lead to further defaults.
Baoding Tianwei Baobian Electric Co Ltd, a subsidiary of the state-owned China South Industries Group Corporation, “has been in financial dire straits for some time,” Reuters claims, noting that the default was related to a five-year bond with an initial rating of AA+ that has since been downgraded to BB due to consistent operating losses in recent years.
Baoding is now the third listed Chinese firm to publicly default on an interest payment, but it is the first state-owned company to do so. Moreover, while the previous instances involved small companies defaulting on commercial bonds, Baoding’s bond originated in the interbank market, which involves much larger sums provided by institutional investors like banks and hedge funds.
According to Bloomberg, some observers believe the default “highlights a shifting attitude toward financial risk, underscored by [Chinese] Premier Li Keqiang’s pledge to open a cooling economy to market forces,” and that further defaults could follow. (RELATED: Chinese Firm Buys Saab for $140 Million)
“It’s probably a start of more defaults in China,” Chinese bond analyst Qu Qing told Bloomberg, pointing out that, “The economic slowdown has given a huge blow to some industries.”
China’s economy grew at 7.4 percent in 2014, “downshifting to a level not seen in a quarter century and firmly marking the end of a high-growth heyday,” The Wall Street Journal reported in January.
Growth is expected to slow even further in 2015, the Journal says, because the Chinese economy continues to be burdened by a housing glut, soaring debt and overcapacity in many industries. (RELATED: China Officially Announces Slower Growth Goals)
The cooling economy has led to financial difficulties at other state-owned firms, such as Erzhong Group Deyang Heavy Industries Co., but in previous cases, the Chinese government has stepped in to prevent default.
Investors have typically given Chinese state companies access to cheap credit, assuming that Beijing would bail them out of any difficulties, Business Insider claims, so the lack of support for Baoding could wreak havoc with the country’s bond markets. (RELATED: Blackburn to Obama: Stop Funding Green Firms That Benefit Chinese Investors)
“We need to be aware the government won’t be able to protect all the state-owned companies,” Ivan Chung, an analyst at Moody’s Investors Service, told Bloomberg. “For those that are not strategically important, they may receive less government support and encounter repayment difficulties when their fundamentals weaken.”
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