context: Recent defaults have riled the bond market. Analysts see this as a move by financial regulators to strengthen the long-term positioning of the market by breaking implicit guarantees that SOEs are 'too big to fail'. This may help improve financing for smaller firms as SOEs will disrupt credit markets less, but tightened SOE access to cheap capital will force the latter to become more efficient.
As defaults of SOE bonds continue, SC-FSDC (State Council Financial Stability and Development Committee) held a meeting on 21 November to discuss the developments, namely
- major SOEs that have defaulted include
- Brilliance Group, an auto maker controlled by Liaoning SASAC, filed for bankruptcy after defaulting in late October
- Shenyang Shengjing Energy Development Group defaulted due to bankruptcy
- Qinghai State-owned Assets Investment Management Company temporarily cancelled a perpetual bond
- Tsinghua Unigroup defaulted on a C¥1.3 bn bond
- moving forward, SC-FSDC stressed
- financial regulators and market players must adhere to law
- zero tolerance policy towards financial crimes, particularly 'debt evasion'
- strengthening supervision over market entities such as bond-issuing companies, their shareholders, financial institutions, and intermediary institutions
- strengthening departmental coordination to improve risk prevention and maintain reasonable and sufficient liquidity
- continuing financial reforms and improving SOE performance
The defaults have prompted investigations into the financial firms that gave the defaulters their credit rating and the bond underwriters such as Haitong Securities, Everbright Bank and Zhongyuan Bank. Investors argue that financial intermediaries helped firms evade debt by transferring assets without properly notifying authorities or investors. Connected to these investigations is the use of 'structural bonds', a financial product where the issuer purchases part of their own bond. The practice was temporarily banned by the National Association of Financial Market Institutional Investors on 18 November. The ban will hurt the issuance of some smaller companies as well because they also use the 'structural bonds', an anonymous bond underwriter told Economic Observer.
Another major issue revolves around the future credit rating of SOEs, previously the beneficiaries of implicit guarantees that the state would save them. This would impact their credit rating as the company may originally get a lower grade, but because they are state-owned they are boosted to higher credit ratings, reports Economic Observer. Breaking the implicit guarantee is a positive move towards marketisation in the long run, but will be painful for investors in the short-term.