Huatong Drives Biggest Jump in Chinese Debt Costs Since November

Borrowing costs for Chinese companies leapt by the most in eight months amid concern Huatong Road & Bridge Group Co. may become the second onshore corporate to default on its bonds.

One-year top-rated commercial paper yields jumped 26 basis points last week, the steepest such period increase since mid November, to 4.957 percent, the highest since April 16, according to Chinabond.

“The market has turned cautious because investors are concerned there will be more companies like Chaori or Huatong,” said Liu Dongliang, a senior analyst in Shanghai at China Merchants Bank Co., the nation’s sixth-biggest lender. “Economic signs of recovery are weak and companies are facing huge debt burdens. We can’t exclude the possibility there will be more companies that may default.”

China faces a second onshore bond non-payment after builder Huatong Road & Bridge said last week it may be unable to redeem 400 million yuan ($64.5 million) of one-year debentures which mature July 23. Solar-panel maker Shanghai Chaori Solar Energy Science & Technology Co. missed a partial coupon payment in March on 1 billion yuan of notes, increasing concern that mounting debt among the nation’s corporates may spark other missed obligations as well as company collapses.

All Efforts

The yield on Huatong Road & Bridge’s 7.3 percent notes surged to 27.02 percent on July 18 from 6.02 percent July 16 after the default warning. Under market rules, Shanxi province-based Huatong Road & Bridge must transfer the outstanding money to a clearing house by 4:30 p.m. tomorrow, company official Geng Naizhuang said by phone July 18. It’s making all efforts to raise the funds, with help from the local government and bond underwriters, Geng said. Two phone calls made to the company today weren’t answered.

The price of some AA- notes, the local equivalent of junk bonds, fell today. The yield on Anyang Iron & Steel Inc.’s 6.9 percent notes due February 2019 rose 17 basis points to 10.42 percent as of 11:32 a.m. in Shanghai, the biggest advance in a month, exchange data show.

Huatong Road & Bridge’s potential default comes as policy makers seek to instill market discipline amid rising debt. Companies in China had $14.2 trillion of debt at the end of last year, more than the some $13.1 trillion owed by U.S. companies, Standard & Poor’s said in a June 15 report.

A default would shake investor confidence in short-term notes, which are considered safer than regular longer-dated corporate bonds, and might cause money managers to doubt the implicit guarantees from debt underwriters, Standard Chartered Plc credit strategist Becky Liu said on July 17.

— With assistance by David Yong, and Judy Chen

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