CHINA'S CORPORATE DEBT MARKET IN A STORM

Since early November, the Chinese corporate debt market has been hit by several severe defaults, although on the contrary, without any negative implications at all.

During the past month, the Chinese corporate bond market has been hit by a range of defaults or delayed repayments. The bond issues that defaulted are truly among the big tickets, like the debt issued by Tsinghua Unigroup Co.

The company itself lately defaulted on an USD 450 million large bond issue, but the missing repayment triggered other defaults to a further USD 2 billion– this is dramatic, or under normal circumstances, would be very dramatic.

The development is pretty much domestic, which is most likely the reason why the international headlines have been relatively few. The companies, or even conglomerates, all belong to the “State Owned Enterprise” (SOE) part of the Chinese corporate world.

The assumption and hope among domestic investors have always been that the government will back the SOEs when it comes to the debt repayment. The expectations have not necessarily been that the central government in Beijing should back the companies and the debt, but more likely that the local governments in the provinces should provide support in a stressed financial situation.

Since years, many investors have had a reservation towards corporate debt issued by the Chinese SOEs, simply because the annual balances and governance haven’t offered satisfying insight and comfort for the investors. Put in another way, investors have considered too many corporate bond issues from SOE companies as way riskier than the yield indicated.