China has seen a surge in the number of cancelled bond issues following a wave of defaults by state-owned enterprises (SOE’s) that has put domestic investors on edge.
Data from Wind indicates that the period from 1 November to 16 December has seen the cancellation of at least 182 bond issuances involving a total sum of 138.2 billion yuan. This compares to cancellations of just 61.389 billion yuan in September and 34.25 billion yuan in October.
Out of the 182 bond cancellations since the start of November 169 have been made by local SOE’s, accounting for 93% of the total. These local SOE bonds were worth 121.8 billion yuan, for 88% of the total fund-raising amount.
The cancellations were made by issuers that possessed solid credit standing – 61 of the entities cancelling their issues had AAA credit ratings, while 30 had AA+ credit ratings.
The surge in cancelled bond issues arrives in the wake of a wave of defaults, chiefly by Chinese SOE’s, starting with an announcement made by Henan province’s Yongcheng Coal on 10 November that it was unable to make one billion yuan in payments.
Apparel company Shandong Ruyi is the latest defaulter, with underwriter Bank of Communications announcing on Monday that it had missed the repayment deadline for a one billion yuan bond.
2020 has seen a total of 91 bond defaults by Chinese state-owned enterprises, with a default balance of 108.7 billion yuan, while private Chinese companies have defaulted on 100 bonds, for a default balance of 102.7 billion yuan.
Data from Wind indicates that the value of China’s outstanding bonds is currently 113.32 trillion yuan, including 38.59 trillion yuan in credit bonds, and 27.5 trillion yuan in the credit bonds of non-financial institutions.
Domestic analysts have expressed strong concern to state-owned media about the potential impact of further defaults upon China’s financing environment.
“Using defaults as an excuse to abscond from debt is a cause for concern,” said one senior executive from the fixed income department of Shenzhen-based brokerage to Securities Times (证券时报).
“Once bond market investors believe that the rules can be broken with impunity, this will also impact regional financial credit, and could lead to a tightening of regional finance and a rise in financing costs.
“Once the credit environment is ruined, re-establishing it is an extremely difficult matter. We can use the past defaults of private enterprises as reference – their financing environment has never been truly restored.
“The recent failure of five bond issues in Henan province is the direct result of the Yongcheng Coal default.”