A state-owned company (SOE) in northern China's Inner Mongolia province defaulted over the weekend on a 1 billion yuan ($142.1 million) private bond, the latest in a string of corporate delinquencies that raised concerns about contagion risk as the economy slows down.
Hohhot Economic and Technological Development Zone Investment Development Group, operated by Hohhot's local government, said it was in the process of repaying the money after the deadline on Dec. 6.
Failure to meet bond repayments puts the spotlight on other debt-laden municipalities that have borrowed heavily in recent years and raises questions as to where the central government would tolerate an increase in defaults as they allow markets to play a greater role in risk discernment.
7.6 Trillion Yuan Fund Delinquency
According to rating agency Moody's, Chinese local governments had a funding gap of 7.6 trillion yuan in 2018. The stress is likely to rise as the country cuts taxes and boosts fiscal expenditure to support a Chinese-US battered economy.
"Chinese local governments are still under relatively high stress to pay down outstanding debts," Industrial Securities analyst Huang Weping disclosed during the weekend. He urged investors to be alert to financial vehicles owned by provincial governments that are financially unstable.
Hohhot Economic and Technological Development Zone released bonds worth 1 billion yuan in 2016 to select shareholders to repay bank loans, fund construction projects, and replenish equity, according to a Reuters prospectus.
At the end of the third year of maturity, creditors had the option of selling the securities back to the lender or keeping them for another two years.
Payment Deadline Fail
On Saturday, China's interbank clearing house issued a notice reporting that it had not received full interest payment from the Hohhot Economic and Technological Development Zone by the end of the Dec. 6 deadline, official Shanghai Securities News reported on Monday.
Two of the issuer's representatives, who declined to be identified, acknowledged that the compensation deadline was not reached but did not provide financial details citing the deal's private nature. A finance department official said the company was working to allow repayments.
The bond loss comes on the heels of missed payments by two state-owned companies, Peking Founder and Tewoo Group from Tianjin, raising questions about the safety of financially vulnerable SOEs.
So far, in China's bond market, defaults by state-owned companies are relatively rare. Reuters estimates of official data indicate that this year 42 private companies struggled in contrast to only six state-owned companies.
