The heavy debt problems of Chinese (Communist Party of China) state-run companies are starting to scare investors in corporate bonds around the world. Investors are fleeing bonds issued by Chinese companies, according to FTSE Russell.
According to the Nikkei, the premium in foreign currency terms is rising as the debt of Chinese civil engineering and construction companies engaged in public works projects to prop up the economy swells. Recently, these bonds are coming under pressure to sell as debt defaults by large Chinese companies soar and foreign investors believe the Chinese (Communist Party) government is no longer implicitly providing financial support to state-owned companies and banks.
Data show that debt-servicing costs for Chinese companies are rising, with $2.14 trillion in bonds set to mature by 2023, 60% more than the value of bonds maturing between 2018 and 2020. Chinese companies typically issue bonds with relatively short maturities of one to three years. Given the continued issuance of new bonds, redemption costs for issuing companies are expected to remain high.
For example, Huarong, a Chinese financial group specializing in the acquisition and management of non-performing loans, is now struggling with its own debt woes. Huarong owes investors nearly $51.11 billion in outstanding bonds, nearly 60% of which are set to mature in 2023. The group recently received approval from creditor banks to postpone about $100 million in debt repayments until the end of August, while stepping up the sale of stakes in Nanjing Panda Electronics and other companies, showing signs of difficulty.
It is worth noting that Huarong is not the only debtor facing a wave of bond redemptions. There are also many large state-owned enterprises with top-tier debt.
China National Railway Group, which is directly managed by the Communist Party, must redeem about $90 billion in bonds by the end of 2023, while State Grid Corp. of China is required to repay about $14 billion in debt. The two unlisted companies are saddled with huge debts, partly due to a lack of cost control. China’s civil engineering, construction companies, railroads and grid operators are required to redeem $600 billion, or 30 percent, of their corporate bonds by 2023, according to the report.
Although the Chinese (Communist Party) leadership intends to cut the government’s implicitly funded guarantees to prevent excess debt by state-owned enterprises from damaging the government’s credibility, defaults on these corporate bonds are increasing at a record pace so far this year, reaching 95 billion yuan ($14.78 billion) in the January-April quarter alone. If government support wanes amid increasing redemptions, the default rate will rise further.
For this reason, overseas investors are closely monitoring trends in foreign currency-denominated debt, which accounts for nearly 10% of the Chinese market. As defaults on these bonds increase, and as another batch of bonds are set to mature by 2023, leading to growing nervousness among foreign investors.
According to Refinitiv, more than 10 dollar-denominated Chinese corporate bonds have defaulted since 2020, including Beijing University’s Founder Group, which went bankrupt in February 2020 after saying it could not pay the principal and interest on its dollar bonds. Founder Group had attached a “keep well” clause to a U.S. dollar bond issued by a subsidiary. Although the clause usually means that a company’s financial health is guaranteed by its parent company, Founder Group removed the subsidiary from its repayment guarantee, saying the clause did not require it to make repayments. Some investors have filed lawsuits.
Tsinghua Ziguang Group has also repeatedly defaulted on its U.S. dollar bonds. Citigroup’s Hong Kong unit has responded by filing a lawsuit in February demanding the state-owned semiconductor company pay principal and interest on the debt.
Premiums on investment-grade bonds issued by Chinese companies rose 0.4 percent over U.S. Treasuries in April, according to FTSE Russell data. The rise contrasted with narrower premiums for South Korea, Hong Kong, Indonesia and other bonds against a backdrop of excess liquidity in major global currencies.
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