(Adds details about company, context on government policy)
SHANGHAI, April 1 A small construction materials
company failed to pay interest on 180 million yuan ($29 million)
of bonds, a national newspaper said on Tuesday, marking China's
second default on a domestic bond in a matter of weeks.
The latest default news underlines fears of rising credit
risks in China, partly fuelled by signs that the economy is
slowing down, especially the real estate sector, a key driver of
Xuzhou Zhongsen Tonghao New Board Co Ltd missed an interest
payment due March 28 on high-yield bonds issued last year
, the 21st Century Business Herald reported. With a
coupon rate of 10 percent, according to Thomson Reuters data,
the interest payment would be worth 18 million yuan.
A default by Xuzhou Zhongsen would be the first in
China's high-yield bond market, which was launched in June 2012
in a bid to expand financing channels for small, private firms.
It comes after Shanghai Chaori Solar Energy Science and
Technology Co Ltd missed an interest payment on a
yuan bond last month, becoming China's first-ever domestic bond
Chaori's default was seen as a landmark for Chinese markets,
turning on its head a long-held assumption that even
high-yielding debt carried an implicit state guarantee.
Following Chaori's default, Premier Li Keqiang warned that
China's economy faced "severe challenges" and that further
defaults would be "hard to avoid," signalling the government has
become more reluctant to step in to support failing companies.
Semiconductor, software, and commodities firms are among the
most at risk for default, a Reuters analysis of more than 2,600
Chinese companies showed.
Market reaction to the latest default news was muted. The
Shanghai Composite Index closed 0.7 percent higher on
A comparable corporate bond from Heilongjiang Beidahuang
Agricultural Group Corp, also due to mature in 2015
and carrying a relatively low AA rating, changed
hands at a yield of 6.1 percent on Tuesday, unchanged from
Still, shares in Shandong Molong Petroleum Machinery Co Ltd
dropped as much as 8.9 percent on Tuesday after the
company reported a full-year loss for 2013.
Molong is due to pay a coupon on June 7 on 500 million yuan
in bonds issued last June. The bonds offered a
yield of 15 percent on Tuesday, up from 6.7 percent in late
February. The company told Reuters earlier this month that
rising yields are unrelated to its ability to repay debts.
Xuzhou Zhongsen is an affiliate of Zhongsen Tonghao Group
Co, whose businesses include construction materials, real estate
and logistics. The company, based in east China's prosperous but
highly indebted Jiangsu province, makes synthetic wood-like
materials used in ceilings, floors and panelling. It couldn't be
reached for comment.
Prices for steel, copper and other basic materials have
fallen in recent months as the real estate market and broader
economy have slowed.
Xuzhou Zhongsen's bonds were guaranteed by Sino-Capital
Guaranty Trust Co Ltd, but it declined to pay out, arguing that
the guarantee had been issued by one of its local branch offices
without head-office approval, the newspaper said, quoting an
Sino-Capital had sufficient funds to honour the guarantee,
the 21st Century Business Herald said.
Beijing's tougher debt stance comes after leaders said they
would allow market forces to play a greater role in the economy
and to move away from the breakneck growth that was fuelled at
times by wasteful investment. By forcing markets to price risk
more accurately, they hope to cut back on poor investment
The trick for policymakers is to prod markets in the right
direction without undermining confidence in the financial system
following a massive buildup of debt since the global financial
crisis. China's overall debt-to-GDP reached 221 percent at
end-2103, according to Standard Chartered estimates. Corporate
debt accounts for the majority of that total.
Highlighting the difficult financing conditions facing
small, private firms, Xuzhou Zhongsen has also resorted to
high-interest borrowing from China's shadow banking sector to
In July 2012, China Jingu International Trust Co Ltd sold an
investment product worth 1 billion yuan to wealthy investors
based on a loan to the company. The product offered a yield of
9.5 to 10.5 percent and paid off on schedule when it matured in
Xuzhou Zhongsen's bonds were still priced at a discount of
less than 2 percent to par value on Tuesday, Thomson Reuters
data showed, which likely indicates the bonds are not regularly
traded, with no transactions in recent days or weeks that would
reflect the market's latest assessment of their value.
(Reporting by Gabriel Wildau; Additional reporting by Xu Yong
and Shanghai Newsroom; Editing by Mark Bendeich and Neil