March 19, 2014 / 11:51 AM / 4 years ago

China comment reinforces signal that debt carries risk

SHANGHAI/HONG KONG, March 19 (Reuters) - A denial by China’s central bank that it is involved in emergency talks to bailout a troubled property developer reinforced signals Beijing is now more willing to let banks and other investors take losses on loans.

Media reports said the central bank was in talks with Zhejiang Xingrun Real Estate Co, which government officials have said is on the brink of bankruptcy. That led to financial market speculation the government could bail out the company.

However, the reports “did not accord with reality”, the People’s Bank of China said in a post on China’s Twitter-like Weibo. “The PBOC has not joined any crisis management process with Zhejiang Xingrun.”

Domestic media said Zhejiang Xingrun, based in eastern Zhejiang province, owes banks about 2.4 billion yuan ($387 million) and individual investors another 1.1 billion, which officials said was raised illegally by the company’s owner and his son. They have been detained.

For years, investors have assumed that authorities will bailout companies that run into financial problems.

The fact authorities did not step in to prevent China’s first default on a domestic bond earlier this month raised major doubts about that assumption. And the central bank’s comments distancing itself from the Zhejiang Xingrun case underscored the point, analysts said.

“The recent default case is all backed by government initiative to let the market play a bigger role in valuation. It is an opportunity to educate investors and issuers on how to work in this market,” said Qiong Wu, credit analyst with BOCI Securities in Hong Kong.

“So far, credit quality was not a consideration and investors were chasing high yields without caring for credit quality. This will create awareness.”

Chinese property stocks, including Shenzhen-listed China Vanke and Poly Real Estate, fell on Wednesday after the central bank denial.

Still, the local government where Zhejiang Xingrun is based said it is negotiating with six banks over how to resolve the company’s outstanding debts, suggesting officials remain involved in managing the process.

Fenghua city government said the central bank was not involved, but said city officials had met with representatives from the Zhejiang-based branches of China Construction Bank , Agricultural Bank of China , Ping An Bank, Shanghai Pudong Development Bank, Evergrowing Bank and China Zheshang Bank to consider how to resolve Zhejiang Xingrun’s outstanding loans. The banks declined to comment.

While Beijing wants to signal that investors should be prepared to adopt more risk, analysts cautioned against reading too much into recent events.

Both solar equipment producer Chaori Solar, which defaulted on the bond, and Zhejiang Xingrun, are privately held and do not represent a risk to the financial system.

In addition, Zhejiang Xingrun’s investments are localised in Ningbo, where property prices have been falling steadily for years as a speculative bubble inflated by loan sharks has gradually deflated.

“The government has a track record of letting private companies fail. This has happened before,” said Terry Gao, an analyst at ratings agency Fitch.

“It does not necessarily follow that the local government will not bail out selective local government public sector entities,” Gao said. “That means the contingent liability of potential bailouts could still be large.” ($1=6.19 yuan) (Reporting by Adam Jourdan and Pete Sweeney in SHANGHAI and Umesh Desai in HONG KONG; Editing by Neil Fullick)

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