Bond market: Looking for the silver lining in China’s SOE defaults
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Bond market: Looking for the silver lining in China’s SOE defaults

Some of China’s largest state-owned companies have become bond market pariahs after a spate of defaults. This may be just what the country’s markets need.

General Views of Financial District in Beijing
Source: Bloomberg via Getty Images

The decline of China Huarong Asset Management Co, the country’s largest distressed debt manager, raises important questions about whether the government will allow a state-owned firm to fail.

Huarong’s problems caught many investors by surprise. After all, it was only a few years ago that the bad debt manager was considered a highly desirable investment.

Wind back to April 20, 2017, when a group of 18 underwriters worked around the clock to price a six-tranche international bond for Huarong: Investors too stayed up late, jostling for the notes, after pouring $15 billion of orders into the $3.4 billion-equivalent deal.

Huarong raised an impressive $9.4 billion from the debt market in 2017, on top of the $6 billion it had already taken in 2016. Few would have imagined its eventual downfall this year, when some of its bonds slumped to below 60 cents on the dollar.

The defaults happened as the government focused on trimming down the pace of credit growth
Leonard Kwan, T Rowe Price
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The sell-off was triggered when Huarong failed to meet the deadline of March 31 to release its 2020 annual financial statement, spooking investors.

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