China defaults seen rising after Sinosteel misses payment

[BEIJING] China bond defaults are forecast to climb after a state-owned steelmaker missed an interest payment, raising questions about the government's commitment to stand behind such firms.

Sinosteel Co. failed to pay interest due Tuesday on 2 billion yuan (US$315 million) of 5.3 per cent notes maturing in 2017 after saying it will extend the deadline as it plans to add a unit's stock as collateral. That came after the National Development and Reform Commission planned to meet noteholders and ask them not to exercise a redemption option on Tuesday to force full repayment, people familiar with the matter said last week.

Chinese authorities are weeding out weak state firms that Premier Li Keqiang called zombies. Australia & New Zealand Banking Group Ltd warned that rising debt in the sector may drag economic growth down to as low as 3 per cent. Two state- owned companies, Baoding Tianwei Group Co and China National Erzhong Group Co, reneged on obligations earlier this year, according to China International Capital Corp and China Bond Rating Co.

"Sinosteel's default means we will see more and more real bond defaults, in which investors may not get full repayment, in China," said Ivan Chung, an associate managing director at Moody's Investors Service in Hong Kong. "The government may want to reduce its intervention in default cases and let market forces play a bigger role."

Sinosteel's failure to pay interest on time constitutes a default, according to Industrial Securities Co, Haitong Securities Co and China Merchants Securities Co. China Bond Rating Co said in a report Wednesday if Sinosteel bond investors had agreed to the delay of interest payment, it didn't constitute a default, whereas if they hadn't, it did. Sinosteel hasn't said in its statements whether it got permission from investors, and two calls to the company on Wednesday went unanswered.

Flagging authorities' balancing act as they try to liberalize markets while preventing turbulence, Mr Li said last week the government will prevent systemic risks and banks should not cut or withdraw lending to companies which are in "temporary" difficulties.

The coal mining, steel and shipbuilding industries have the highest default risks and there may be more bond defaults next year, according to Mr Chung at Moody's. China Merchants analysts led by Sun Binbin said in a report Tuesday among steel bond issuers investors should watch default risks of Sansteel Minguang Co, Liuzhou Iron & Steel Co and Xining Special Steel Co because of their low cash inflows.

BLOOMBERG