Chinese Firms Owe Roughly $24 Billion in Overdue Credit Bonds

December 24, 2020 Updated: December 24, 2020

The latest indicator of China’s economic woes is the number of credit bonds nationwide that could not be repaid on time—164 of them, involving a sum of 160 billion yuan (about $24.43 billion).

Borrowers include state-run enterprises who were previously rated AAA by Chinese bond rating agencies.

The Chinese market has three types of bonds: government bonds that were issued by different level governments; credit bonds issued by companies; and convertible bonds, issued by listed companies and which can be converted into shares of common stock in the issuing company or cash of equal value.

Chinese state-run media Economic Observer reported the latest bond market statistics collected by Wind, a Chinese private financial services company.

“164 credit bonds that were issued by 27 enterprises were in repudiatory breach by Dec. 18 in this year,” it reported. “Among them, the sum breached by state-run enterprises was 51.897 billion yuan ($7.92 billion), or three times more than the figure in 2019, 12.93 billion yuan ($1.97 billion).”

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An employee working in the workshop of a lithium battery manufacturing company in Huaibei, eastern China’s Anhui province on Nov. 14, 2020. (STR/AFP via Getty Images)

For example, Henan Yongmei is a state-run coal company located in central China’s Henan Province and was rated AAA in the financial market. On Nov. 10, Yongmei announced that it could not pay a credit bond that matured, with principal and interest valued at over 1 billion yuan ($150 million).

On Nov. 23, Yongmei announced that it also could not replay its other credit bonds, valued at over 2 billion yuan. At the same time, Yongmei had 21 credit bonds that had not yet matured, valued at 21.41 billion yuan ($3.27 billion) in total.

According to company data, its current debt-to-asset ratio is over 77 percent. On Nov. 11, the second day after Yongmei couldn’t pay the matured credit bond, China Chengxin Bond Rating Agency downgraded Yongmei’s rating from AAA to BB.

Yongmei chairman Qiang Daimin said during a Nov. 23 press conference that the company would follow the decision of the Financial Stability and Development Committee, China’s financial regulatory body under the State Council.

At press time, Yongmei is still operating. The company paid interest on the first matured bond and said it would soon pay half of the principal.

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Laborers work at a coal mining facility in Huaibei, eatern China’s Anhui Province on March 4, 2014. (STR/AFP/Getty Images)

Brilliance Auto, the largest state-run vehicle manufacturer in Liaoning Province, was ranked AAA by at least two Chinese bond rating agencies, Dagong Global and Dongfang Jincheng. On Sept. 20, Brilliance could not pay back interest on its matured credit bonds.

Since then, the company claimed that it had no cash to pay the principal and interest of its credit bonds, and its rating was downgraded to A+.

On Nov. 20, the Shenyang Intermediate People’s Court ruled that Brilliance’s creditors should reorganize the company—meaning Brilliance had gone bankrupt. But Brilliance’s joint-ventures with European automakers BMW and Renault were not impacted.

Chinese economists have previously pointed to the problem of unreliable ratings by Chinese bond rating agencies.

Only six such agencies have formal licenses in China, according to state-run media Jing Wei.

The Jing Wei report cited a researcher at the Central University of Finance and Economics Ren Guozheng, who said some of these agencies will give a better rating to borrowers that pay more.

Meanwhile, partner at Beida Zonghe Management Consulting Group Wang Chunmi said the bond rating business lacks regulations.

State-run media Securities Times published an editorial on Dec. 17, noting that state-run enterprises are often backed by local governments—which would make agencies more inclined to hand out a AAA rating.

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Workers are seen at a construction site in Beijing, China on Dec. 17, 2020. ( NOEL CELIS/AFP via Getty Images)

The overdue bonds are another reflection of China’s downtrodden economy.

State-run website China Real Estate reported on Dec. 21 that office and store rentals have gone down in all Chinese first-tier cities.

The report quoted real estate agencies in China’s commercial hub of Shanghai, which said roughly ten percent of offices in the city’s busiest areas were empty, while 40 percent of offices were empty in relatively rural areas of the city.

British commercial real estate services firm Debenham Thouard Zadelhoff (DTZ) released its Beijing Q3 market report on Sept. 28, noting that the rental rate of offices kept decreasing in Beijing. Meanwhile, the vacancy rate reached the highest point in the past ten years.