When we read about China’s economy, most news talks about how quickly the Red Dragon is recovering from the coronavirus crisis.
However, there is other important news that we need to pay attention to.
Several government-supported Chinese companies defaulted recently in the bond market—some missed payments of interest and principal.
What is alarming is that investors have seen these same firms as safe investments with attractive yields.
Defaults by government-supported firms in China were rare in the past. The Chinese government used to rescue almost every company in financial trouble, and investors believed that behind any bond issued was an implicit government guarantee.
This recent wave of corporate defaults that surprised many in the market is making other companies cancel their new issuances.
According to the newsmagazine Nikkei Asia, “at least 57 companies have called off plans to issue a combined 44.2 billion yen ($6.72 billion) of new fixed income securities in the domestic market as of Thursday [November 19] since Huachen Automotive Group defaulted on principal and interest of a 1 billion yen bond on Oct. 23.”
These are not small companies.
Huachen is a state-owned enterprise (SOE), and it controls Brilliance China Automotive Holdings, a Hong Kong-listed automaker that has a partnership with BMW to produce cars in China.
Among the defaults are firms from very different sectors, like technology, real estate, and financial.
And experts say that more defaults are coming since national and local governments are tightening the stimulus now that the worst of the pandemic in China is apparently gone.
Some see in all this a silver lining, which is a kind of “cleaning” process in the market, eliminating companies that are not healthy financially and making clear who they are — a differentiation hard to do when they have government support.
The National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory body under the People’s Bank of China, issued new rules for domestic debt issues this week, forbidding companies from buying their own bonds and increasing disclosure requirements.
The week before, the Chinese interbond market regulator said it would launch investigations into three banks Industrial Bank Co , China Everbright Bank, and Zhongyuan Bank Co, which helped companies issue these bonds.
Xigema Certified Public Accountants and China Chengxin International Credit Rating Co are also suspected of violating rules.
China’s onshore bond market is huge. It’s the world’s second-largest and worth $13 trillion, according to Reuters.
The Chinese bond wave selloff followed a recent Chinese internet stock selloff.
Earlier this month, tech giants in the country lost $290 billion of market value only two days after Beijing issued new regulations against monopolistic practices in the internet industry.
Companies like Alibaba, Tencent, and Xiaomi were hit hard.
The Hang Seng Tech index shows how drastic the movement was.
The crackdown also took investors by surprise.
On the same day, Ant Group’s world record-setting IPO was suspended.
The decision was announced just two days before the dual listing on the Hong Kong Stock Exchange and Shanghai’s Star Market (China’s version of the tech-heavy Nasdaq).
The Chinese Ant Group, the e-commerce giant Alibaba’s financial affiliate, expected to raise $34.5 billion in its initial public offering, breaking the current record for the largest IPO ever, from Saudi Aramco, the Middle East oil company, that raised $29 billion in December 2019.
Ant Group’s Jack Ma and other top executives were summoned and interviewed by regulators the previous day. Recently Ma publicly criticized Chinese regulators, saying they are too risk-averse, which harms innovation.
For many, it’s not a coincidence that the Ant IPO was suspended one week after his comments.
The Chinese government has given signs that don’t welcome the increasing influence of some local businessmen, especially in the tech sector, a segment that plays a critical role in the country’s economic growth.
Note from Rob: I’ve been studying China closely, and now I’m fully convinced: their economy is on the brink of total collapse. Watch my urgent briefing to learn why that’s actually good news for traders prepared to play it correctly.