Investors ’growing investment in tremendous finances in China’s most economically fragile provinces has sparked a sell-off in government-run group bonds, as analysts have warned of a growth of defaults in the market. of the country’s $ 17tn credit.
The average yield on bonds issued by state-owned enterprises in six large provinces and municipalities suffering from weak finance jumped to more than 5 percent in the second quarter, from less than 3.5 percent a year ago. This contrasts with a national trend in which most SOE bond yields have fallen lower in the last six months. Yields increase when bond prices rise.
Financial stresses underscore how Covid-19 and China’s subsequent economic recovery have deepened the divide between the country’s more dynamic regional economies and its less developed ones. They also came as global investors increasingly scrutinized China’s bond market, where confidence was shaken by the series of defects related to the State.
The six regions that are closely monitored by investors – Hebei, Henan, Liaoning, Shanxi, Tianjin and Yunnan – have so far been able to avoid mass defaults while provincial authorities have intervened to prevent a handful of defaults from falling. in a more serious wave.
Across China, S&P estimates that Rmb4.2tn ($ 650bn) of bonds are due this year and also Rmb1tn in put options that give bondholders the right to early repayment.
While “only three” SOEs in these regions were omitted in March and April, such “silenced” defects may be “temporary,” analysts at Fitch Ratings wrote in a note.
“The secondary market price has already taken into account, to some extent, those growing default risks in those weaker regions,” said Shuncheng Zhang, Fitch analyst in Shanghai. “Some regions – such as Yunnan and Tianjin – have seen a fairly noticeable rise in secondary market output.”
Fears of rising deficits also come as investors increasingly question the Chinese authorities ’appetite to save SOEs in distress.
The pandemic has widened the finances of some regional governments, S&P Ratings analysts said, leaving fewer funds available for rescuing state-owned companies.
“SOE support is more selective, and tolerance for defaults is growing,” S&P analysts said. “This means an increased willingness to allow unprofitable SOEs to fail.”
Fitch analyst Jenny Huang said Beijing has been “very clear” about its intention to challenge the long-term hypothesis of state-linked lending and its investors that the government will intervene to support them. if they blame themselves.
Liu He, China’s vice premier and economic tsar of Xi Jinping, led a campaign where regulators intensified scrutiny of the country’s corporate debt market and added loans to debt-laden SOEs.
Beijing has tried to “test the water” with the gaps between SOEs and investors are looking closely at how a similar approach could be extended to institutions such as cash-strapped. investment groups that are linked to local governments, Huang added.
Analysts have said that, while there have been fewer Default of the Chinese enterprise this year, the scale of missed payments has grown.
In the first six months of 2021, 11 issuers with Rmb95bn of bonds were bankrupt, compared to 17 issuers and Rmb92bn in the first half of 2020, S&P said. Each borrower this year had on average three times the value of outstanding loans compared to 2017, and nine times that of 2015.
S&P analysts said “the gaps are getting higher and higher, with a greater impact on markets and investors.”
However, Huang said the risk of contagion from groups in weaker provinces to other parts of the Chinese financial system was “quite low” and was likely limited to “companies of similar profile.”