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| China Sees First Domestic Junk Bond Default | China Sees First Domestic Junk Bond Default |
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| HONG KONG — China’s nascent market for domestic junk bonds has had its first default, a report in the state-run media said on Tuesday, just weeks after the country experienced its first default in the domestic corporate bond market. | |
| In a fresh sign that China’s slowing economic growth is causing real pain for the country’s companies and investors, Xuzhou Zhongsen Tonghao, a manufacturer of construction materials, has been unable to meet the interest payments on 180 million renminbi, or $29 million, worth of bonds it sold to local investors last year, according to a report Tuesday in The 21st Century Business Herald, a financial newspaper based in Guangzhou. | |
| China established its domestic high-yield bond market two years ago in an attempt to open a new funding channel for small and medium-size enterprises. Since then, dozens of companies have sold bonds via private placements to local investors. Such bonds, often referred to as junk because of the creditworthiness of the companies that sell them, pay higher yields to reward investors for the greater risk they entail. | China established its domestic high-yield bond market two years ago in an attempt to open a new funding channel for small and medium-size enterprises. Since then, dozens of companies have sold bonds via private placements to local investors. Such bonds, often referred to as junk because of the creditworthiness of the companies that sell them, pay higher yields to reward investors for the greater risk they entail. |
| The default, which took place Friday, came after the company ran into financial difficulty and was unable to make a payment of 18 million renminbi on its high-yield bonds, which pay 10 percent interest annually, according to the report. | |
| Bondholders, who were not named in the article, are unlikely to recoup the payment or principal after the guarantor of the bonds, the Sino-Capital Guaranty Trust Company, said it would not offer compensation, citing restructuring problems at Xuzhou Zhongsen, according to the report. | |
| Xuzhou Zhongsen, based in the coastal province of Jiangsu, did not immediately reply to emails seeking comment Tuesday. Phone calls to Sino-Capital Guaranty went unanswered. | |
| The default at Xuzhou Zhongsen is the second in less than a month in China’s 8.5 trillion-renminbi onshore corporate bond market. On March 7, the Shanghai Chaori Solar Energy Science and Technology Company, a maker of solar cells and panels, defaulted after failing to make an annual interest payment of 89.8 million renminbi on a bond of 1 billion renminbi. | |
| Also last month, the Zhejiang Xingrun Real Estate Investment Company, a small property developer in the coastal city of Ningbo, collapsed after being unable to repay more than 3.5 billion renminbi in debt. | Also last month, the Zhejiang Xingrun Real Estate Investment Company, a small property developer in the coastal city of Ningbo, collapsed after being unable to repay more than 3.5 billion renminbi in debt. |
| These new signs of corporate stress are emerging as China’s economic growth decelerates to its slowest pace in more than a decade. On Tuesday, two surveys showed that China’s manufacturing sector continues to struggle with weak output. | These new signs of corporate stress are emerging as China’s economic growth decelerates to its slowest pace in more than a decade. On Tuesday, two surveys showed that China’s manufacturing sector continues to struggle with weak output. |
| A purchasing managers’ index published by HSBC and Markit fell to an eight-month low of 48 points in March from the February final reading of 48.5. A separate, official P.M.I. published by the national statistics agency, which is more heavily geared toward larger, state-owned enterprises, showed a reading of 50.3 in March, up slightly from 50.2 in February. A result over 50 indicates manufacturing is expanding, while a reading under 50 signals contraction. | A purchasing managers’ index published by HSBC and Markit fell to an eight-month low of 48 points in March from the February final reading of 48.5. A separate, official P.M.I. published by the national statistics agency, which is more heavily geared toward larger, state-owned enterprises, showed a reading of 50.3 in March, up slightly from 50.2 in February. A result over 50 indicates manufacturing is expanding, while a reading under 50 signals contraction. |
| Given the continuing signs of weakness in China, the world’s second-biggest economy after the United States, investors and analysts are starting to expect policy makers in Beijing will take action, possibly in the form of new economic stimulus measures. In a speech last week, Premier Li Keqiang said China’s leaders “should not ignore the downward pressure” on the economy. He pledged to accelerate already-approved plans for state investment in infrastructure projects and the construction of subsidized housing. | Given the continuing signs of weakness in China, the world’s second-biggest economy after the United States, investors and analysts are starting to expect policy makers in Beijing will take action, possibly in the form of new economic stimulus measures. In a speech last week, Premier Li Keqiang said China’s leaders “should not ignore the downward pressure” on the economy. He pledged to accelerate already-approved plans for state investment in infrastructure projects and the construction of subsidized housing. |
| “This does not mean a major, or high-profile, stimulus plan, as these projects are already in China’s medium-term plans,” Louis Kuijs, an economist at the Royal Bank of Scotland in Hong Kong, wrote on Tuesday in a research note. “But the call to accelerate them does matter, nonetheless, in terms of what it means for the macro policy stance.” He added that he expects the government to moderate its crackdown on rapid credit growth. | “This does not mean a major, or high-profile, stimulus plan, as these projects are already in China’s medium-term plans,” Louis Kuijs, an economist at the Royal Bank of Scotland in Hong Kong, wrote on Tuesday in a research note. “But the call to accelerate them does matter, nonetheless, in terms of what it means for the macro policy stance.” He added that he expects the government to moderate its crackdown on rapid credit growth. |
| The lack of previous defaults in China’s domestic bond market is seen by many as a sign of the market’s immaturity. It is still largely closed to foreign investors, and critics say it does a poor job of pricing in risk. In offshore markets, by contrast, Chinese companies have sold bonds denominated in dollars to international investors, and some of those have defaulted. A default last year by Suntech Power was a notable example in the solar industry. | The lack of previous defaults in China’s domestic bond market is seen by many as a sign of the market’s immaturity. It is still largely closed to foreign investors, and critics say it does a poor job of pricing in risk. In offshore markets, by contrast, Chinese companies have sold bonds denominated in dollars to international investors, and some of those have defaulted. A default last year by Suntech Power was a notable example in the solar industry. |
| Across Asia, defaults of corporate junk bonds are expected to rise only slightly this year compared with 2013, Moody’s Investors Service said Monday in a news release. The ratings agency expects the default rate for Asian high-yield bonds sold to international investors to climb to 2.9 percent this year from 2.1 percent last year — equal to two or three potential defaults — as China’s growth slowdown and the United States Federal Reserve’s move to rein in its bond-buying program weigh on companies in the region. | Across Asia, defaults of corporate junk bonds are expected to rise only slightly this year compared with 2013, Moody’s Investors Service said Monday in a news release. The ratings agency expects the default rate for Asian high-yield bonds sold to international investors to climb to 2.9 percent this year from 2.1 percent last year — equal to two or three potential defaults — as China’s growth slowdown and the United States Federal Reserve’s move to rein in its bond-buying program weigh on companies in the region. |
| China’s leaders have indicated they will tolerate some slowing growth, even if it leads to defaults, as the price of pushing through an ambitious program of financial overhauls that were unveiled by the Communist Party leadership in November. | China’s leaders have indicated they will tolerate some slowing growth, even if it leads to defaults, as the price of pushing through an ambitious program of financial overhauls that were unveiled by the Communist Party leadership in November. |
| “I’m afraid sometimes in certain individual cases such defaults are hardly avoidable,” Mr. Li, the premier, said last month after a meeting of the country’s rubber-stamp legislature. He said the government would pay close attention to such cases to “ensure that there will be no regional or systemic financial risks.” | “I’m afraid sometimes in certain individual cases such defaults are hardly avoidable,” Mr. Li, the premier, said last month after a meeting of the country’s rubber-stamp legislature. He said the government would pay close attention to such cases to “ensure that there will be no regional or systemic financial risks.” |
| “We don’t want today’s steppingstone to become tomorrow’s stumbling block,” Mr. Li said. | “We don’t want today’s steppingstone to become tomorrow’s stumbling block,” Mr. Li said. |