A Chinese state-owned group caught in the country’s wave of defaults owes billions of dollars to lenders, raising fears that the bond market shakes are also sweeping the banking sector.
According to a creditors’ document viewed by the Financial Times, nearly 70 Chinese and foreign banks, as well as trust companies, had 33.5 billion Rmb ($ 5.1 billion) in outstanding loans to Huachen Automotive Group l ‘last year. The revelation comes as the country’s multibillion-dollar debt markets have been rocked by failures of government-backed companies.
The defaults shattered a long-held belief among investors that local governments in China would always bail out struggling state-backed groups and raised fears about the health of the financial system as a whole.
Some creditors have said they are reassessing their exposure to Huachen, whose subsidiaries include BMW’s partner in its manufacturing joint venture in China, after defaulting on a RMB 1 billion bond in October. Huachen, based in the northeast city of Shenyang, is controlled by the Liaoning provincial government.
2.5 billion rmb
Amount Huachen owes to two of China’s major public banks
“We worked with Huachen because it is the largest state-owned enterprise in Liaoning and the local government cannot afford to let it go,” a banker of one of Huachen’s creditors told FT.
Those who have granted loans to Huachen include the China Construction Bank and the Industrial and Commercial Bank of China, two of the country’s “big four” state banks. Huachen owed them 2 billion rmb and 642 million rmb respectively, according to the creditor’s document which took stock of the group’s loans until September of last year.
Huachen’s largest foreign creditor is Singapore’s DBS, which owed Rmb 779 million.
According to people directly involved in the talks between Huachen, Liaoning Province and the group’s creditor banks, the loan numbers have not changed much since.
Wei He, analyst at Gavekal Dragonomics, said the recent wave of defaults could lead to a deterioration in the quality of assets in Chinese banks. The operations of these lenders are strongly influenced by the government and they have a strong incentive to support local public enterprises. “Gone are the days when Chinese banks could roll over troubled debt indefinitely to make their financial statements look good,” He said.
Huachen had also borrowed a total of Rmb 2.5 billion from two large centrally controlled state policy banks: the China Development Bank and the Export-Import Bank of China. Foreign investors have flocked to Chinese bank bonds at a record pace this year.
CDB’s brokerage arm has taken out Huachen bonds worth over Rmb9 billion, including the one it defaulted on. CDB Securities itself held 1 billion rmb of debt from Huachen.
Bank of Jinzhou, a small Liaoning-based lender that was rescued by ICBC last year, owed 950 million rmb. Jinzhou was one of three small banks that were closed or restructured in 2019. Small banks such as Jinzhou, which have come under increasing pressure in recent years, account for more than 30% of Huachen’s outstanding borrowing.
The problems in Huachen and elsewhere could have broader implications for the way credit flows through China’s financial system.
Chinese banks typically allocate annual loan quotas to provinces and cities. The state-dominated industrial sector of Liaoning has traditionally been supported by public financial institutions, on the assumption that it enjoys strong support from the provincial government.
But the banker of one of Huachen’s creditors said if the provincial authorities did not negotiate a “good solution” between the group and those it owed, “we would drastically reduce our quota of loans in Liaoning.”
A bondholder told the FT that officials in Huachen and Liaoning have taken a hard line in their negotiations with creditors. “Huachen and the local government believe that banks should make concessions to support [Liaoning’s] economy, ”they said.
DBS said: “A failure to manage [Huachen’s] The debt issue will shake the confidence of foreign institutions and global investors, including DBS, in the business environment and economic outlook in Liaoning and northeast China. “
Additional reporting by Tom Mitchell in Singapore
A Chinese state-owned group caught in the country’s wave of defaults owes billions of dollars to lenders, raising fears that the bond market shakes are also sweeping the banking sector.
According to a creditors’ document viewed by the Financial Times, nearly 70 Chinese and foreign banks, as well as trust companies, had 33.5 billion Rmb ($ 5.1 billion) in outstanding loans to Huachen Automotive Group l ‘last year. The revelation comes as the country’s multibillion-dollar debt markets have been rocked by failures of government-backed companies.
The defaults shattered a long-held belief among investors that local governments in China would always bail out struggling state-backed groups and raised fears about the health of the financial system as a whole.
Some creditors have said they are reassessing their exposure to Huachen, whose subsidiaries include BMW’s partner in its manufacturing joint venture in China, after defaulting on a RMB 1 billion bond in October. Huachen, based in the northeast city of Shenyang, is controlled by the Liaoning provincial government.
2.5 billion rmb
Amount Huachen owes to two of China’s major public banks
“We worked with Huachen because it is the largest state-owned enterprise in Liaoning and the local government cannot afford to let it go,” a banker of one of Huachen’s creditors told FT.
Those who have granted loans to Huachen include the China Construction Bank and the Industrial and Commercial Bank of China, two of the country’s “big four” state banks. Huachen owed them 2 billion rmb and 642 million rmb respectively, according to the creditor’s document which took stock of the group’s loans until September of last year.
Huachen’s largest foreign creditor is Singapore’s DBS, which owed Rmb 779 million.
According to people directly involved in the talks between Huachen, Liaoning Province and the group’s creditor banks, the loan numbers have not changed much since.
Wei He, analyst at Gavekal Dragonomics, said the recent wave of defaults could lead to a deterioration in the quality of assets in Chinese banks. The operations of these lenders are strongly influenced by the government and they have a strong incentive to support local public enterprises. “Gone are the days when Chinese banks could roll over troubled debt indefinitely to make their financial statements look good,” He said.
Huachen had also borrowed a total of Rmb 2.5 billion from two large centrally controlled state policy banks: the China Development Bank and the Export-Import Bank of China. Foreign investors have flocked to Chinese bank bonds at a record pace this year.
CDB’s brokerage arm has taken out Huachen bonds worth over Rmb9 billion, including the one it defaulted on. CDB Securities itself held 1 billion rmb of debt from Huachen.
Bank of Jinzhou, a small Liaoning-based lender that was rescued by ICBC last year, owed 950 million rmb. Jinzhou was one of three small banks that were closed or restructured in 2019. Small banks such as Jinzhou, which have come under increasing pressure in recent years, account for more than 30% of Huachen’s outstanding borrowing.
The problems in Huachen and elsewhere could have broader implications for the way credit flows through China’s financial system.
Chinese banks typically allocate annual loan quotas to provinces and cities. The state-dominated industrial sector of Liaoning has traditionally been supported by public financial institutions, on the assumption that it enjoys strong support from the provincial government.
But the banker of one of Huachen’s creditors said if the provincial authorities did not negotiate a “good solution” between the group and those it owed, “we would drastically reduce our quota of loans in Liaoning.”
A bondholder told the FT that officials in Huachen and Liaoning have taken a hard line in their negotiations with creditors. “Huachen and the local government believe that banks should make concessions to support [Liaoning’s] economy, ”they said.
DBS said: “A failure to manage [Huachen’s] The debt issue will shake the confidence of foreign institutions and global investors, including DBS, in the business environment and economic outlook in Liaoning and northeast China. “
Additional reporting by Tom Mitchell in Singapore
