SHANGHAI, Nov 20 (Reuters) - China's investigation into the
shock bond default by a state-owned coal miner hit shares of its
listed underwriters on Friday, while shedding light on the
creaking infrastructure of the country's $4.4 trillion corporate
Top-rated Yongcheng Coal & Electricity Holding Group
defaulted on a 1 billion yuan ($152 million) bond on November
10, stunning investors.
Shares of Industrial Bank Co and China
Everbright Bank fell in Shanghai on Friday after
regulators said the two underwriting banks were suspected of
Hong Kong-listed Zhongyuan Bank Co was also
Recent bond investors' "flight to quality" exposes defects
in China's bond market infrastructure, said Wang Qian, financial
professor at Tongji University.
More specifically, the scandal calls into question a popular
model in China's interbank market, where banks underwrite bonds
for their loan clients, who then use the proceeds to repay loans
or roll over debt.
In Yongcheng's case, the three lead underwriters are also
lenders to its parent, Henan Energy and Chemical Industry Group.
"Some banks even underwrite bonds for companies to which
they're no longer willing to lend," a bond fund manager said on
condition of anonymity.
Wang added that companies should sell bonds mainly to fund
business operations, rather than to repay loans.
The default of the AAA-rated Yongcheng bonds further
tarnishes China's credit rating business. Over 90% of defaulted
bonds had A, double A, or triple A ratings at the time of
delinquency, which had helped inflate prices, Wang said.
If rating agencies fail to signal a borrower's
creditworthiness truthfully, "to some extent, they're misleading
investors," said Ligang Liu, chief China economist at Citi
That partly explains why global investors are rushing into
Chinese sovereign bonds, while largely avoiding higher-yielding
Chinese corporate bonds.
"We don't invest in the onshore market, exactly for those
reasons," said Tiansi Wang, senior credit analyst at Robeco in
"We think, so far, there's no proper risk pricing in that
market. For us, as fundamental investors, it's not a market to
($1 = 6.5754 Chinese yuan)
(Reporting by Samuel Shen and Andrew Galbraith; additional
reporting by Tom Westbrook; editing by Jason Neely)