Just hours after Chinese property developer Kaisa defaulted [6] on two dollar-denominated 2018 notes (the 30-day grace period on some $52 million in interest due March 18 expired), we learn that a third publicly-listed Chinese firm will now miss a coupon payment proving yet again that “you never know where the skeletons in the closet are or what company will be next.”
This time it’s Baoding Tianwei Group Co.. which, as Bloomberg reports [7], has been struggling for quite some time:
“Our company suffered huge losses in 2014 and the debt to asset ratio surged quickly,” Baoding Tianwei said in today’s statement. “Our company has lost financing ability and suffered from a capital shortage. We can’t raise enough money to repay interest, despite all the efforts we have made.”
Baoding Tianwei had a loss of 10.14 billion yuan in 2014, according to today’s statement. A statement from the company on April 3 showed that by the end of last year, Tianwei had some 1.86 billion yuan of overdue borrowings. Its 22.96 percent stake in listed firm Baoding Tianwei Baobian Electric Co. has been frozen by local courts because of its dispute with creditors, according to China Credit Rating Co.
The interesting thing about Baoding Tianwei though, is that it’s a subsidiary of a state-owned firm and initially, some observers wondered whether the parent would step in to avert a default by the power transformer manufacturer which needed to make nearly $14 million in interest payments on April 2016 notes by the close of business Tuesday.
As it turns out, the government did not intervene and Baoding Tianwei has indeed defaulted marking the first default by a state-run enterprise.
The implication is that Beijing may allow the market to play a greater role in determining companies’ financial future — even if those companies are state-run. This sets up an interesting dynamic considering that 1) it’s looking increasingly likely that the dreaded “hard landing” will materialize in China, and 2) at more than $14 trillion as of 2013, the country has the largest corporate debt burden on the planet. Here’s Bloomberg again:
China’s economy expanded at the weakest pace since 2009 last quarter, with output, investment and retail data pointing to a deepening slowdown, data released by the statistics bureau in Beijing on April 15 showed. On Sunday, the central bank cut the reserve-requirement ratio for banks by 1 percentage point, stepping up stimulus policies.
China’s corporate debt is the highest in the world, former central bank adviser Yu Yongding wrote in the official China Daily last week. Companies had $14.2 trillion in debt at the end of 2013, exceeding every other country including the U.S., which had $13.1 trillion in company obligations, Standard & Poor’s said in a June report…
“We need to be aware the government won’t be able to protect all the state-owned companies,” Ivan Chung, an analyst at Moody’s Investors Service, said in a phone interview today. “For those that are not strategically important, they may receive less government support and encounter repayment difficulties when their fundamentals weaken.”
For its part, China South Industries Group (Baoding Tianwei's state-owned parent) had the following to say about the issue:
"The affair has no connection with us."
