"China's State-Owned Enterprise Restructuring Commitment... Regional and Global Bond Market Instability Expected"

"Reevaluation Needed for Credit Risk of Keepwell-Structured Chinese Foreign Currency Bonds"

[Asia Economy Reporter Kim Eunbyeol] The Chinese government is increasing its determination to restructure poorly performing state-owned enterprises, leading to a reassessment of the credit risk of Chinese foreign currency bonds, and there are forecasts that instability in regional and offshore bond markets may recur accordingly.

The International Finance Center stated on the 18th, "If a default occurs in a large state-owned enterprise, it could negatively affect investor sentiment across the Asian foreign currency bond market."

Since last year, defaults on onshore and offshore corporate bonds in China have been increasing, and the recent Huarong Asset Management crisis has highlighted the credit risk of Chinese state-owned enterprises.

Last year, defaults on corporate bonds by state-owned enterprises such as Tsinghua Unigroup and Huachen Automotive reached a record annual high of 79.5 billion yuan, and in the first quarter of this year alone, it is approaching 34 billion yuan. Offshore foreign currency bond defaults also reached about 3.2 billion dollars in the first quarter of this year, more than double the 1.5 billion dollars in the fourth quarter of last year.

As China's economic recovery strengthens, since the second half of last year, the Chinese government has gradually reduced its stimulus policies and has been strengthening management of real estate and local government debt. Goldman Sachs also evaluated, "The significant increase in onshore corporate bond defaults centered on state-owned enterprises since the fourth quarter of last year suggests that government support for the credit market is decreasing as the economy recovers."

Liu He, Vice Premier of the State Council of China
Photo by Reuters

Liu He, Vice Premier of the State Council of China, who is leading economic and financial reforms, has expressed since last year the position that defaults by large state-owned enterprises should be allowed to ensure efficient allocation of resources and prevent moral hazard. In other words, as China shows signs of economic recovery, "credit restraint" and "prevention of moral hazard" are reemerging as policy goals.

The International Finance Center viewed that Korean foreign currency bonds are mostly of high credit quality and have a direct issuance structure, so the impact from instability in Chinese bonds is expected to be limited.

However, from the perspective of domestic investors, it advised that it is necessary to reassess the credit risk of Chinese foreign currency bonds with Keepwell structures and consider adjusting exposure. A Keepwell agreement is a contract in which the parent company commits to providing support to ensure that the subsidiary maintains sufficient liquidity and financial soundness. The Chinese government is showing signs of reducing support for state-owned enterprises, which is lowering investor confidence in Keepwell agreements.

According to the JP Morgan Asia Credit Index, the outstanding issuance of Chinese Keepwell bonds amounts to about 87.8 billion dollars, accounting for 14% of Chinese foreign currency bonds.

The International Finance Center expressed concern, stating, "Investors are worried about scenarios where the Chinese government rescues mainland parent companies but allows defaults or debt restructurings of offshore subsidiaries."

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