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PBOC tries to soothe nerves after SOE debt shocks

China's central bank injects more than US$120b into country's banking system but short-term interbank borrowing costs remain elevated

Shanghai

CHINA'S central bank injected more than US$120 billion into the country's banking system on Monday in a move to soothe rattled nerves after a series of debt shocks involving state-owned enterprises (SOEs) led to a bond selloff last week.

Despite the People's Bank of China (PBOC) issuing 800 billion yuan (S$163 billion) of medium-term lending facility (MLF) loans - the largest such monthly injection since 2016 - short-term interbank borrowing costs remained elevated, reflecting concerns among traders and investors that more debt surprises may yet lurk among state-backed firms.

The volume-weighted average rate of the benchmark interbank seven-day repo, a gauge of short-term cash conditions, stood at 2.3801 per cent on Monday, up from 2.2953 per cent a week earlier.

"Despite the huge net cash injection, liquidity was still a bit tight. But some investors hope that the default last week was purely an act by the local government, and that won't lead to wider credit risk," said a trader at a Chinese bank.

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Chinese banks and fund managers dumped their holdings of corporate bonds last week following a default by state-owned Yongcheng Coal & Electricity Holding Group Co, just weeks after the company raised money through a debt issue.

The company had boasted a top-shelf AAA rating from local agency China Chengxin International Credit Rating Co Ltd before its default, when it was cut to BB.

China Chengxin did not immediately respond to a request for comment on its rating methodologies.

Yongcheng said on Friday it had made interest payments on its maturing debt and was working to raise funds to repay principal.

But the company's woes come amid a series of defaults and downgrades of SOEs that have shaken investors' assumptions about what constitutes a safe investment.

Huachen Automotive Group, the state-backed parent of BMW's Chinese venture partner also defaulted, and state-backed integrated circuit maker Tsinghua Unigroup Ltd saw its bonds tumble after a warning from a rating agency.

Fitch Ratings said on Monday it expected the number of state-owned entity defaults to rise marginally in 2021.

SOE defaults are not new, but Goldman Sachs analysts Kenneth Ho and Chakki Ting said many new defaults have been from large borrowers, "helping to reduce the notion that some companies may be 'too big to fail'". The recent preponderance of SOE defaults suggests the government is less likely to implicitly support state firms, they added.

The result has been a rocky ride for a market used to expecting government bailouts.

"Although most investors agreed that the implicit guarantee model is not sustainable in the longer run, it is still a painful transition when time comes," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore. "(The) market is likely to watch various provincial governments' attitude towards their commitment to repay the debt."

Monday's flood of MLF loans brought to mind the PBOC's large liquidity injections following its May 2019 seizure of Baoshang Bank due to what it said were "serious credit risks".

The takeover of Baoshang, a small Inner Mongolian lender, sent interbank borrowing costs rocketing higher and prompted a sharp widening of spreads as investors reassessed small banks and fled to high-rated names.

But market participants said worries this time would be harder to assuage.

"Baoshang could be solved by the PBOC with liquidity injections, but faith in AAA is hard to restore," said a director at a local brokerage.

On Friday, Baoshang wrote down the principal of a 6.5 billion yuan bond and said it would make no further interest payments. REUTERS

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