China lets state firms default - April 25, 2015

China lets state firms default

Chinese Baoding Baobian Tianwei Electric Co Ltd failed to pay the $13.8 million of bond interest due 21 April, which means that the state-owned company might go bankrupt. This is without precedent in China.

The company is owned by Baoding Tianwei Group, a larger power company that is a state owned company, defaults on bond, according to Reuters. The company warned a week ago that it has not raised enough funds to make a bond interest payment. The 5-year bond is maturing in 2016 and has a coupon of 5.7 percent.

This development might increase fears of slowing Chinese economy and could signal a watershed moment for China’s state-owned companies: the government will not be able to protect all state-owned companies, it is probably a start of more defaults due to excessive lending and bond issue. If these presumptions spread, this can cause a serious damage for the Chinese bond market and for the financial market in general.

In addition, Kaisa, a real estate developer, listed on the Hong Kong stock exchange, announced on 20 April that it had missed two interest payments that is $51.6 million. The company, of course, has been negotiating with bondholders but we can already spot the cracks in the Chinese building pedestal. However, it is also an important milestone. This is the very first time that a real estate developer is default on its dollar-denominated debts.

By Innovative Securities