MNI EXCLUSIVE: No Bailout Guarantee For China's Dollar Debtors

     BEIJING(MNI) - Chinese authorities may step in to help over-stretched big

companies meet dollar bond payments if they pose systemic risk but even some

state-owned enterprises might be left to cope on their own as the country's

corporate sector faces a maturity spike next year, policy advisors and market

participants told MNI.

     Several state-backed firms have already missed dollar repayments in 2019,

with Moody's reporting over USD6 billion of offshore defaults so far. The next

12 months will see a bulge in maturities at a time when the authorities may be

straining to keep the economy growing at 6%. According to Moody's, about USD78

billion in non-financial corporate dollar bonds will come due, together with

about USD60 billion in debt sold by financial institutions. Of these maturing

bonds, about USD8.4 billion are yielding above 15%.

     Authorities are likely to intervene if a systemically-important state-owned

enterprise struggles to pay its debts, said Peng Xingyun, deputy director of the

National Institution for Finance and Development under the Chinese Academy of

Social Sciences.

     Defaults have also risen in China's domestic bond market as the economy

faces headwinds and authorities push for increased borrowing to support growth,

he said. Difficulties for some state-owned enterprises, including heavily

indebted monopoly operations, have been intensified by rising commodity prices.

     "Repayments in the offshore market are going to continue to be under

pressure," Peng said, "Dealing with dollar bond defaults is going to be

important, as defaults by SOEs could have an impact on the country's

creditworthiness."

     --MATURITY SPIKE

     A significant portion of the dollar bonds sold in 2017, a peak year for

issuance, come due next year, according to Chang Shuyu, researcher at the

Chinese Academy of Social Sciences (CASS). While overall default risk is not

necessarily rising, some companies could struggle to raise sufficient dollars

via overseas profits or to refinance in a difficult domestic environment.

     Qinghai Provincial Investment Group, a state-backed aluminium producer, has

twice missed interest payments on a USD300 million bond this year. Haikou Meilan

International Airport, controlled by state-owned Hainan Airline, failed to repay

a USD200 million dollar debt. Government-backed commodity giant Tianjin Tewoo

Group unveiled a debt plan after admitting difficulties coping with about

USD1.25 billion in liabilities.

     One dollar bond, sold by Founder Group, has seen its yield surge by 1,068

bps since October. The company, controlled by state-owned Peking University,

missed payment of a CNY2 billion onshore bond earlier this month and conceded

that its cash flow was "extremely tight". It is now seeking strategic investors.

     Over USD20 billion of Chinese offshore corporate bonds are yielding 15%,

with more than USD16 billion of those at more than 20% in the secondary market,

Nino Siu, senior analyst with Moody's Greater China Credit Research, told MNI.

     "The risk of defaults and failure to refinance of these companies is very

high," she said.

     The government will also take social stability into account when deciding

on whether on bailouts, Siu said. A province-level funding vehicle supporting

public welfare projects, for instance, would probably be rescued, whereas state

enterprises in competitive sectors might be allowed to go under, she said.

     Some advisors pushing for market liberalisation say a default process could

help China's offshore bond market mature. Jia Kang, former head of the Chinese

Academy of Fiscal Sciences under the Ministry of Finance, told MNI that

investors should no longer automatically expect state-owned enterprises to be

rescued if they run into trouble.

     --MARKET DISCIPLINE

     In the longer run, Chinese offshore issuance, still small compared to bank

loans, is set to rise, said Jia, but he added that market discipline has to be

properly applied to unfit firms.

     About 80% of non-investment grade Chinese corporate dollar issuance this

year has been sold by property developers looking to refinance earlier loans,

according to Moody's Siu. Total Chinese corporate offshore issuance should hit

USD200 billion for the whole year, including over USD110 billion for

refinancing.

     Demand for refinancing should keep total Chinese corporate issuance at

about USD200 billion for the next few years, Siu said. Local government funding

vehicles have also increased debt sales since 2018, when domestic regulators

cracked down on their borrowing in yuan.

     Advisors, though, told MNI issuance might be stable or even fall in 2020.

     "The authorities are still cautious regarding corporate offshore borrowing,

particularly by companies without overseas income, such as property developers

and local government funding vehicles," Chang said. Officials are also wary of

exchange rate risk, she said, noting that China's sudden devaluation of its

currency by over 3% in August 2015 triggered an outflow of capital to pay dollar

debt.

     "Chinese companies have learned from that experience and are increasingly

hedging risks via exchange rate forward products," Chang said, adding that

investors did not expect a significant depreciation of the yuan next year, and

that currency fluctuations should have limited impact on debt repayments during

that timescale.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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