Photographer: Qilai Shen/Bloomberg

China's Latest Default Flags Debt Concerns Raised by Moody's

  • Dalian Machine Tool misses payment on privately placed bonds
  • Borrowing costs in China have surged amid leverage crackdown

China’s latest corporate bond default is highlighting concerns about rising company debt that Moody’s Investors Service cited in its downgrade of the nation’s credit rating Wednesday.

Dalian Machine Tool Group Corp., based in the northeastern rust belt province of Liaoning, failed to repay 543 million yuan ($79 million) of principal and interest on privately placed notes due May 20, according to a statement to Shanghai Clearing House on Thursday. The default comes as authorities’ steps to curb the pace of credit expansion in the economy have pushed up borrowing costs, with the average yield on AA+ rated securities due in five years rising to a two-year high around 5.5 percent this month.

China’s President Xi Jinping is trying to rein in the world’s biggest corporate debt load without sparking a rash of company failures that could drag on already flagging economic growth. Moody’s forecast that economy-wide debt of the government, households and non-financial companies will continue to increase, from 256 percent of gross domestic product at the end of last year according to the Institute of International Finance.

Defaults in China’s local public bond market are a relatively new phenomenon, and have picked up pace since the government allowed the first one in 2014. There were a record 29 defaults on publicly issued notes in 2016, and there have been 13 this year, according to data compiled by Bloomberg.

Seeking Funds

Dalian Machine Tool, which had already defaulted on three publicly issued bonds this year, is in an industry that’s ripe for consolidation, according to Bloomberg Intelligence. The company is seeking funds for repayment on the defaulted private placement note, it said in the statement.

Moody’s cut its rating on China’s debt on Wednesday for the first time since 1989, to A1 from Aa3. The new level is the rating agency’s fifth-highest investment grade.

Fitch Ratings has kept its China rating at A+, which is also its fifth-highest investment grade score, since 2007. While the credit assessor expects the nation’s economy to grow “broadly in line” with the official 6.5 percent target this year, a “build-up of imbalances and vulnerabilities” poses risks to economic and financial stability, according to Andrew Fennell, a director of sovereign ratings.

“In the months ahead, we will continue to monitor these factors, and the degree to which tighter financial regulations and monetary conditions introduced by the authorities in recent months are able to successfully contain these risks,” Fennell said in an email.

— With assistance by Judy Chen

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