UPDATE 1-China says risk in bonds of big state-owned firms 'controllable'

* Railway firm’s woes led to ‘comprehensive’ probe of others

* Operations of state-owned firms ‘trending better’ - commission

* Defaults have caused China markets to price in increasing risk

* Traders expect bail-outs of major firms, if needed (Adds details, comments)

By Lu Jianxin and Pete Sweeney

SHANGHAI, May 6 (Reuters) - China’s state asset manager, in the wake of increasing debt defaults have rattled Chinese markets, on Friday called risk in bonds issued by central government-owned firms “controllable”.

The State-owned Assets Supervision and Administration Commission (SASAC) said it made the conclusion after a detailed probe into all bonds issued by such enterprises.

The investigations were launched after one firm, China Railway Materials Co Ltd, in mid-April sought suspension of trade in 16.8 billion yuan ($2.60 billion) worth of its debt instruments, as the company struggles to make payments.

Following that risk warning, SASAC “conducted a comprehensive probe of various bonds issued by 106 central government-owned enterprises,” the commission said in a statement on its website.

“While the central government enterprises are faced with negative factors such as a slowdown of the economy, their operations are trending better and their financial indications are stable,” it said. “Overall their debt risk is controllable.”

Chinese markets are pricing in increasing risks following an unprecedented number of defaults this year. A long list of high-yield bond issuers in the $8 trillion domestic debt market are due to make debt payments this month.


Yields of benchmark one-year corporate notes AA+CNCP1Y=RR have jumped an average 35 basis points since late March. Benchmark five-year corporate notes AA+CNMT5Y=RR have surged nearly 60 basis points since early April. (Graphics

More than 100 Chinese firms delayed or cancelled at least $15 billion in onshore bond and other fixed-income issuance in April.

Some analysts in China suggest that there is a high risk that about 500 bonds worth around 700 billion yuan ($108 billion) could fail to make payments on their due dates.

With the economy beginning to slow sharply last year, “company operations have become increasingly difficult, making bond issuers face increasing pressure to pay off their debt,” a senior trader at a Chinese state-owned bank in Shanghai said.

“Still, while an increasing number of companies are defaulting, it is widely believed the government will intervene to contain a possible explosion of such cases to prevent a self-fulfilled financial crisis,” he said.

Traders say the state is almost certain to bail out any central government-owned enterprise needing it, as big firms are the pillar of the economy.

SASAC appointed government asset firm Chengtong Group to manage China Railway Materials’ debt issue. Given prospects that its payment problem would be ironed out, China’s interbank market operator resumed trading in its debt instruments in late April. ($1 = 6.5 yuan) (Editing by Richard Borsuk)