SHANGHAI, Nov 13 (Reuters) - Chinese banks and fund managers
dumped their holdings of riskier corporate bonds on Friday after
a series of defaults by top-rated state-owned enterprises (SOEs)
sent shockwaves through the mainland corporate bond market.
As lower-rated bond yields rose, analysts speculated the
defaults suggested authorities were going back to cleaning up
excessive debt build-up in an economy emerging from the
A Chinese miner that defaulted this week meanwhile canceled
Fridays investor meeting for fear it would turn chaotic after
too many creditors showed up.
Investors have traditionally seen bonds issued by
state-owned firms as less risky due to their perceived
But the recent delinquencies by Yongcheng Coal & Electricity
Holding Group Co and other government-owned bodies triggered a
selloff this week in debt issued by state firms, raising fears
of a brewing credit crisis.
"Once the credit environment is destroyed, it's very
difficult to rebuild confidence," wrote Qu Qing, an analyst at
Jianghai Securities, highlighting a risk that investors will
desert credit bonds for Chinese government bonds and policy bank
bonds if the situation deteriorates.
The nervousness also spilled into the stock market, where
Chinese banking shares fell on Friday over concerns they would
face increased bad loans.
Investor flight from the credit market could push up
financing costs and squeeze corporate funding in an economy that
is just recovering from the pandemic-induced slump.
Executives from Yongcheng Coal's state parent, Henan Energy
and Chemical Industry Group, were set to hold a meeting with
major creditor banks in Henan province on Friday.
But the meeting was canceled after too many creditors
attended, raising fears of chaos, said three people with
knowledge of the situation.
Creditors are keen to get their money back, after the coal
miner on Nov. 10 said it failed to make principal and interest
payments on 1 billion yuan ($151 million) in commercial paper.
The fresh default comes on the heels of debt woes at Chinese
property developer Evergrande, which is Asia's largest
junk bond issuer, and a default by Huachen Automotive Group, the
state-backed parent of BMW's Chinese venture partner.
Investors also dumped bonds by state-backed integrated
circuit maker Tsinghua Unigroup Ltd this week following a debt
warning from a rating agency.
With debt running at three times GDP, Chinese debt markets
are prone to let off steam but this is the first time since
mid-2019 when regulators took over Baoshang Bank that credit
stresses have shown up.
Interest rates on corporate bonds had already been creeping
up as investors brace for the central bank and state banks to
remove the largesse doled out during the coronavirus pandemic.
Huachen's bond prices tumbled to around 10 yuan, a tenth of
face value, on Thursday. Unigroup's bond prices slumped and the
Shanghai Stock Exchange paused trading in some of the company's
debt, while shares of its listed unit dropped 10% on
A number of bond sales have been canceled over the past few
days, while banks have raised the bar for corporate bonds to be
used as collateral, traders and a regulatory source said.
"In the short term, we do not rule out the possibility that
credit risk will spread further, deepening market anxiety,"
wrote Liu Wanjun, fund manager at China Asset Management Co.
In an apparent attempt to ease market nerves, China's
central bank injected a net 160 billion yuan into the banking
system via open market operations on Friday. But traders remain
"Market sentiment is really bad this morning. Everyone is so
worried that it would evolve into a credit crisis," a bond
trader at a Chinese bank said.
A currency trader said there was spillover into the forex
market as well, with short-end yuan swap points climbing.
"The market now expects the central bank to just inject more
cash to soothe market sentiment."
(Reporting by Samuel Shen, Andrew Galbraith and Winni Zhou;
Editing by Vidya Ranganathan and Toby Chopra)