China Has Its Worst-Ever Start to a Year For Defaults

  • Beijing’s leverage war ensnares lower-rated manufacturers
  • Defaults to continue amid rising costs: China Merchants’ Liu

Worst Ever Start for China Bond Defaults

China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing.

Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties.

“Weak companies can’t sell bonds, which adds to the pressure on their cash flow,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “The pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further -- the current yield premium doesn’t provide enough protection against credit risks.”

Stable economic growth prompted the People’s Bank of China to start curbing leverage in money markets in August, and borrowing costs have spiked as a result. The campaign has also hit issuance: firms rated AA, generally considered junk in China, sold 33 billion yuan ($4.8 billion) of bonds in the first quarter, the least since 2011, Bloomberg data show. Chinese companies have scrapped 129 billion yuan of bond sales since Dec. 31, a jump of more than 50 percent from the same period a year before.

China’s central bank boosted rates on loans aimed at small- and medium-sized financial institutions Saturday. Smaller banks have also been caught in the cross hairs of deleveraging, with some said to have missed debt payments in March.

The PBOC might have more monetary tightening in store -- read about that here.

Four of this year’s nine defaulted bonds were issued by companies based in the northeast rust-belt province of Liaoning, which has been among the areas hit hardest by China’s focus on reducing capacity in industries such as steel and coal. Here’s the full line up:

1. Dalian Machine Tool Group Corp.

The top perpetrator, this Liaoning manufacturer defaulted on three bonds this year, after issuing new securities as recently as October. The tool making industry has a large number of players, and is ripe for consolidation, according to Bloomberg Intelligence. Dalian Machine is also based in a province that tumbled into an outright recession last year.

The securities involved include a note due in May 2017, one due in July and another due in January 2019.

2. Dongbei Special Steel Group Co.

This steelmaker based in Dalian, a port city on the Yellow Sea, is a good example of Liaoning’s troubles. The company, partially state owned, was already bailed out in the early 2000s before it had to grapple with the challenges of China’s economy decelerating from around 10 percent growth to sub-7 percent. It’s now defaulted on its sixth bond since its latest financial difficulties began a year ago. The company is in bankruptcy proceedings.

The note defaulted on was originally issued in 2013 and is due in January 2018.

3. Inner Mongolia Berun Group Co.

This investment company is based in the heart of the northern province of Inner Mongolia, which saw a surge in construction during the record credit boom unleashed during the global financial crisis. Berun Group’s home city, Ordos, was dubbed China’s biggest “ghost town,” for all the vacant buildings that went up during the stimulus period. This was the second default within two months for the company, which invests in chemicals and logistics.

The defaulted security was a note issued last year that was due in January.

4. China Shanshui Cement Group Ltd.

While this company is based in Shandong, a province southeast of Beijing that’s better off than its neighbor across the Yellow Sea, Liaoning, cement has become a tougher industry since regulators took steps to rein in China’s property sector. China Shanshui Cement Group has defaulted on several bonds since November 2015 after a boardroom fracas stymied financing. Its Hong Kong-traded shares are suspended.

The bond in question was three-year note issued in February 2014.

5. China City Construction Holding Group Co.

This builder is based in the national capital, but Beijing’s ongoing property boom wasn’t enough to prevent it from missing interest payments. A change in the contractor’s ownership last April triggered early redemption of a Dim Sum bond, and then China City faced difficulties transferring funds offshore to repay the debt. The shifting shareholder structure has had a “serious” negative impact on the company’s ongoing ability to secure funding, according to China Lianhe Credit Rating Co. The company defaulted again early last month.

The security was a bond due in March 2021.

6. Huasheng Jiangquan Group Co. 

Another Shandong-based company, this steelmaker suffered “huge losses” after its subsidiary cut manufacturing of the alloy, according to Dongxing Securities Co., the lead underwriter on the defaulted bond. Premier Li Keqiang said in his address to the National People’s Congress last month that China wants to reduce steel capacity by about 50 million tons. Huasheng Jiangquan repaid the overdue amount on the debt March 22.

The 800 million-yuan bond that was defaulted on was due in March 2019.

7. Zhuhai Zhongfu Enterprise Co. 

A bottle maker for Coca-Cola Co., this company sticks out because it hails from Guangdong, China’s powerhouse exporter province. Zhuhai Zhongfu said in a statement last week that it’s running at a loss amid competition in the industry and weak demand. The company’s controlling shareholder says Zhuhai Zhongfu is planning to make an overdue payment by April 26 on the bond that it defaulted on March 28. The firm defaulted on a separate bond in 2015 and repaid the debt five months later.

The most recent defaulted security was a five-year note due March 28 this year.

— With assistance by Judy Chen, Jessica Zhou, Sida Liu, and Ling Zeng

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