«In the long run, companies must become more transparent and improve corporate governance to restore the confidence of financial institutions,» Chung said. Meanwhile, investors are probably looking to see whether local companies can successfully refinance, notes Ivan Chung, head of greater China credit research and analysis at Moody’s. The yield on one of its dollar bonds hit 14 percent last week, a new high. This is despite Hongqiao Group's reassurance to creditors that they do not have a business relationship. A total of 25 firms defaulted on bond payments in the first six months of 2021, compared with just 19 in the same period last year, the data showed. This dragged down the bonds of at least two seemingly unrelated provincial neighbors. Similarly, aluminum producer China Hongqiao Group and food distributor Shandong Sanxing Group - known to back other companies’ debt- saw their bond prices fall to record lows, as investors fear that one could affect the other. In Shandong, fears of contagion played out in late October, when bad news about a corn and steel conglomerate in the province erupted. It is unclear if the provincial government will do the same, which means that the province risks entering a «vicious cycle that spreads solvency risks to the entire region, swamping the good credits along with the bad,» according to an October report from S&P Global Ratings. For state-owned companies, the default rate was just 0.2 percent in part due to the financial support from the government and better access to funding from banks.Īs a temporary solution, Shandong’s city and local governments have stepped in. However, the figure might understate the true level of defaults given that some borrowers settle with bondholders privately rather than through clearinghouses. The default rate for bonds issued by non-state companies across China increased to a record 4.5 percent in the first 10 months of 2019, Fitch Ratings said in a December report. Recently, the Chinese government has allowed one state-owned company to default, as reported by finews.asia. In Shandong and elsewhere, policymakers have shown willingness to let some weak companies fail, even though they are also under pressure to keep the economy growing and the markets stable. Defaults onshore climbed from zero just a few years ago to 126.7 billion yuan ($18 billion) in 2019. «Shandong’s privately-owned enterprise default rate isn’t particularly high compared to the national one but recently, the risks have exploded,» said Jenny Huang, Director of China Corporate Research at Fitch Ratings, who was quoted in «Bloomberg»( behind paywall).īond investors of Chinese companies face uncertain days ahead. Due to a common practice among Shandong companies to guarantee each other's debts, investors fear that other companies in the same region or sector could be dragged down as these six firms face distress.
The six companies owe 68.1 billion yuan ($9.7 billion) to debtors in total, but the figures could be just the tip of an iceberg. Six private companies in the province of Shandong have defaulted or come dangerously close in the last three months, sending chills down the spine of even seasoned investors.
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