Major Chinese State-Owned Enterprises Default...Concerns Over Chain Bankruptcies Spread

Chain Default of State-Owned Enterprise Bonds in Semiconductor, Automobile, and Mining Sectors
COVID-19 Internal Damage More Severe Than Expected...Growing Concerns Over Liquidity Crisis

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Due to the economic fallout from the novel coronavirus disease (COVID-19) crisis, there are growing concerns that the corporate bonds of large Chinese state-owned enterprises (SOEs) are repeatedly defaulting, potentially triggering a chain of bankruptcies among their subsidiaries and local financial sectors. As the Chinese government signals that it will no longer be responsible for the defaults on SOE corporate bonds, which it had previously prevented through unlimited support and repayment deferrals, investment across the market is shrinking, raising the possibility of a liquidity crisis.

According to local media such as 21st Century Business Herald and major foreign news outlets on the 18th, Yongcheng Coal Electricity, a large state-owned enterprise in central Henan Province, recently announced it has entered default. A few weeks earlier, Huachen Automotive, an automobile company owned by the Liaoning provincial government, announced it could not repay $100 million (approximately 110.3 billion KRW) in three-year corporate bonds, and it is estimated that Yongcheng Coal Electricity, which invested in those bonds, also went bankrupt in a chain reaction.

Huachen Automotive is a state-owned car company with 80% of its shares held by the Liaoning provincial government and is also BMW’s joint venture partner in China. Established in 1958, it was a renowned company, being the first Chinese enterprise to be listed on the U.S. stock market in 1992. However, Huachen Automotive also faced a liquidity crisis due to extreme poor performance. Its independent brand, Huachen Zhonghua, sold only about 500 units per month this year, reflecting weak sales.

Defaults have also been announced in the semiconductor sector, which the Chinese government has designated as a core future industry. Tsinghua Unigroup, a promising Chinese semiconductor company, defaulted yesterday by failing to repay 1.3 billion yuan (approximately 219 billion KRW) in corporate bonds that matured. Tsinghua Unigroup is a memory semiconductor design and manufacturing company in which Tsinghua University, a prestigious university associated with President Xi Jinping, holds a 51% stake. The profitability of Tsinghua Unigroup is difficult to improve in the short term amid consumption contraction caused by the COVID-19 crisis, and its debt amounts to 156.7 billion yuan, placing it in a liquidity crisis. Among this debt, there are 12 domestic Chinese corporate bonds maturing by 2024, totaling 17.7 billion yuan.

The Hong Kong South China Morning Post (SCMP) pointed out, "As defaults continue to appear in corporate bonds issued by Chinese state-owned enterprises, a major shock has been dealt to the world’s second-largest bond market," adding, "This has raised doubts about the guarantees of local governments and the credibility of Chinese credit rating agencies." SCMP also reported interpretations that, while the Chinese government had previously allowed SOEs closely tied to local government finances to defer debt repayments or avoid bankruptcy through large-scale financial support, it may now be starting an exit strategy by reducing the intensity of monetary easing.

Accordingly, the defaults of marginal companies in China, which had been avoided through economic stimulus measures, are likely to expand in a chain reaction. According to market information provider Wind, as of this year, the scale of corporate bond defaults in China has reached 110 cases totaling 126.3 billion yuan. If more defaults occur by the end of the year, it is expected to surpass last year’s record of 149.4 billion yuan.

This content was produced with the assistance of AI translation services.