Stress in China’s Credit Market Spills Over to Financial Stocks
Stress in China’s Credit Market Spills Over to Financial Stocks
(Bloomberg) -- The default of a Chinese coal miner has triggered mounting concern over the health of state-owned firms and their lenders.
The SSE 50 Index of Shanghai’s largest stocks slumped as much as 2.3% on Friday, led by banks and insurers. Bonds of Chinese commodity producers have fallen this week after Yongcheng Coal & Electricity Holding Group Co. defaulted on a 1 billion yuan ($151 million) note.
Coal miners are canceling planned sales of local bonds or extending pricing deadlines as investors turn sour on the sector. Confidence in state-linked firms has already taken a hit following reports Beijing’s local officials were sent to review the finances of prominent Chinese chipmaker Tsinghua Unigroup Co. The company is seeking creditor approval to delay most of the principal repayment on a local bond due Nov. 15, people familiar with the matter said Friday.
There has been a resurgence of credit stress in recent months as several high-profile firms come under financial strain amid the global pandemic. Fears of a credit crunch at China Evergrande Group rippled through the Asian market, while provincial authorities pushed for a court-led restructuring to resolve debt woes at a state-run automaker linked to BMW AG earlier this month.
The string of defaults has prompted at least six Chinese banks to cut their holdings of corporate bonds, with some focusing on notes sold by state-owned firms.
“The market fears more unexpected defaults will come,” said Xiangjuan Meng, an analyst at Shenwan Hongyuan Securities. “Investors are selling riskier bonds at lower prices. Some funds and products may face redemptions.”
While support from the central bank has helped ease defaults, stress has continued to be elevated. Onshore delinquencies reached 92.9 billion yuan so far this year, compared to 117.5 billion yuan for the same period in 2019. By contrast, offshore payment failures climbed 350% to $8.1 billion after another university-linked firm was put under debt restructuring earlier this year.
Chinese dollar bond spreads widened by 1.9 percentage points Thursday, the most since Sept. 25, ending seven straight days of tightening, Bloomberg-compiled data show. Spreads on AAA rated local bonds have climbed to the highest in a month.
Banks Slide
Shares of Industrial Bank Co. and China Everbright Bank Co. fell more than 3.4% on Friday. An index tracking stocks of state-owned enterprises lost 0.8%, its fourth day of losses.
“The credit debt market woes involve some pretty highly rated listed companies and their yield to maturity levels are now close to those of junk debts,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. “Some investors worry that bad loan ratios at banks will spike too.”
China’s $45 trillion banking industry suffered their worst profit slump in more than a decade this year after being put on the front-line in helping millions of struggling businesses hurt by the pandemic. As part of the response, China has allowed many borrowers to delay interest and principal payments to March next year, which is hiding the true sense of the bad debt bulge.
The industry’s non-performing loans climbed to a record 2.84 trillion yuan as of Sept. 30, according to the banking regulator. S&P Global estimated earlier this year that the non-performing asset ratio, a more stringent measure of troubled advances that includes forborne loans, could almost double to 10% from pre-outbreak levels this year. That’s a projected increase of 8 trillion yuan.
©2020 Bloomberg L.P.
With assistance from Bloomberg