China bond market jittery on fears that SOE bailouts will end
Here is the flip side of moral hazard.
Moral hazard is when an investor takes on more risk than he normally would because he is certain the government, or some entity, will protect him by taking on the cost of those risks when the security turns sour.
Well Chinese news agency Caixin reports that the Chinese government is no longer willing to bailout state-run companies that go bankrupt or fall into default. It’s an unusual way to eliminate over capacity in an economy overrun with companies the produce too many goods and not enough revenues.
The repercussions will probably be far reaching as the news gets more attention. In addition, it usually gets harder for a government to sell bonds after it makes it know it’s willing to let bondholders take the loss.
Caixin reported that in “what may have been the first bond trading halt by a central government-run company China Railway Materials (CRM), the nation’s largest supplier of railroad construction wares such as iron rails, stunned the interbank bond market on April 10 by indefinitely suspending trades for all of its 16.8 billion yuan worth of bonds.”
CRM said in a statement the suspension affected notes worth a total of 6.8 billion yuan that were scheduled to mature from May to December. The statement did not say when trading might resume.
The bonds trade on a platform for non-financial companies managed by the National Association of Financial Market Institutional Investors (NAFMII)
Analysts told Caixin that CRM might be the first enterprise directly under the wings of the central government to respond to debt woes by freezing bond trades. But it is certainly not the only Chinese company with bonds in default or edging toward toxicity as the economy slows.
Shanghai Yunfeng Group, a subsidiary of the country’s third-largest property developer, Greenland Holdings, recently defaulted on two batches of privately placed notes worth a combined 2 billion yuan from January to April, according to NAFMII.
The company, 20% owned by Shanghai-government backed Greenland, has so far refused to cooperate with a NAFMII investigation, a source with knowledge of the matter who asked to remain anonymous told Caixin.
Sinosteel, a steel products trader owned by the central government, missed payments on 2 billion yuan worth notes last October. And in April 2015, a maker of electrical transformers named Baoding Tianwei Group, a subsidiary of central government-owned China South Industries Group, became the first government-backed firm to renege on domestic bonds. They were worth 4.5 billion yuan.
Analysts told Caixin the debt problems will impact the non-financial company bond market – traditionally considered an investor safe haven based on implicit trust in central government backing – for months and perhaps years to come.
Market anxiety has already forced some companies to scuttle bond plans reported Caixin. About 49 bond issues were cancelled in March, Guotai Junan Securities reports. Another 20 were scratched from April 1 to 12.