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Fri Dec 27, 2019, 12:07 PM

China's Government Is Letting a Wave of Bond Defaults Just Happen

BY Rebecca Choong Wilkins, Bloomberg Businessweek

China’s had another record year of corporate bond defaults. That’s not a crisis. It’s a plan.

A decade ago, defaults almost never happened, but that wasn’t because companies in China were always healthy. It was a reflection of the tightly controlled financial system, where companies were often linked to the government and bonds were largely bought by state-owned lenders. Authorities have often stepped in to ensure that financially troubled enterprises didn’t crash into default, out of concern over social unrest in the event of job losses or missed payroll payments.

This system imposed little discipline on borrowers. Now global investors are coming into China’s bond market. Though many companies are still state-backed, policymakers are getting more comfortable with defaults. Without them, bond buyers would have little incentive to make a careful assessment of a company’s creditworthiness.

But rising defaults also mean that global investors have to abandon some assumptions about which borrowers are safe. There are some nasty surprises on the long list of companies that have either defaulted or have seen their bond prices plunge. Among them: a would-be Wall Street-style investment bank endorsed by China’s premier and two technology companies connected to top universities. In December, a commodities company called Tewoo Group Corp. delivered the biggest dollar-bond default in two decades by a state-owned enterprise. That event “could prove a turning point,” says Todd Schubert, a managing director for fixed income at Bank of Singapore. It’s getting more dangerous to count on some companies being, in essence, too connected to fail.

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Tewoo’s businesses include mining, logistics, and infrastructure. Based in the industrial city of Tianjin, southeast of Beijing, the company defaulted when its debt had to be restructured, with bondholders being offered as little as 37 cents US on the dollar. After news of Tewoo’s debt restructuring plan, Moody’s Investors Service warned investors that state-owned enterprises that aren’t “strategically important” to the government would be less likely to get bailouts.

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https://www.bnnbloomberg.ca/businessweek/china-s-government-is-letting-a-wave-of-bond-defaults-just-happen-1.1366864

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Reply China's Government Is Letting a Wave of Bond Defaults Just Happen (Original post)
RCW2014 Dec 27 OP
uncledad Dec 27 #1

Response to RCW2014 (Original post)

Fri Dec 27, 2019, 04:37 PM

1. Market risk

Perhaps Xi is liking this idea?

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