Shanxi brokers deal to avoid Huatong default, contrary to Beijing's wishes
Shanxi construction firm meets bond payment after provincial government brokers debt deal, contrary to signals from central government
Central and local governments could be on a collision course in dealing with soaring mainland credit risks after provincial authorities stepped in at the last minute yesterday to help a construction company avoid a damaging debt default.
Market talk of default had swirled for days before the Shanxi-government-brokered deal, which runs contrary to signals from Beijing that defaults at small and medium-sized firms in the country's US$4.2 trillion bond market should be allowed as part of efforts to restructure the economy, and thereby force an improvement in domestic risk analysis by banks and investors.
"This reflects the fact that, although the central government is willing to let defaults happen to restore market discipline, there is significant resistance at case level," Zhu Haibin, chief China economist at JP Morgan, told the
"Those parties involved - local governments, regulators, financial institutions - do not like to let defaults happen, from their own career perspective as well as due to concerns about social dissatisfaction, employment, etc."
Huatong said last week in a statement to the Shanghai Clearing House that it might fail to pay investors' principle and interest on the bond.
It also said chairman Wang Guorui, who was removed from the Chinese People's Political Consultative Conference Shanxi Committee on July 9 for suspected violations of the law, is assisting authorities with an official investigation.
The Shanxi provincial government and the municipal government of Yangquan helped broker the bailout, state-backed reported, avoiding what was expected to be the mainland's second corporate bond default this year.
Chinese companies had accrued US$14.2 trillion by the end of 2013, surpassing the United States and making them the most heavily indebted in the world, ratings agency Standard & Poor's said in a report last month.
In March, Shanghai Chaori Solar Energy Science & Technology failed to make an 89 million yuan interest payment on a one billion yuan five-year bond it issued in 2012, marking the first default at a Chinese corporation in more than a decade.
Analysts called the government's decision to let the company fail a clear sign that regulators sought to bring discipline to the market.
Local bailouts could hinder the development of China's credit market, Zhu said.
"The government should keep their hands off unless it has systemic implications," he said.
Despite the relatively small size of Huatong's near default, the company and its creditors could be links in a long chain of credit, something that may have prompted the local government to act, Kevin Lai, a senior China economist at Daiwa Capital Markets in Hong Kong, told the .
"This is a very intricate part of a credit chain," he said. "If you chase the chain all the way to the end, it might be a lot bigger than anyone expected."
