Ding Dong Dandong – First Chinese Corporate Default After Party Congress
Just over a week ago we highlighted how China’s financial regulator had instructed companies to delay the reporting of bad corporate news until after the Party Congress. As Bloomberg noted…
China’s securities watchdog has asked some loss-making companies to avoid publishing quarterly results this week as authorities seek to ensure stock-market stability during the Communist Party Congress, according to people familiar with the matter.
The China Securities Regulatory Commission made its requests via the country’s stock exchanges, the people said, asking not to be named as they’re not authorized to talk to the media.
At least 17 Shenzhen-listed companies announced delays to their earnings reports from Oct. 20 to Oct. 24, up from three during the same period last year, exchange filings show.
Now that the Congress is out of the way, announcements of corporate debt defaults are also reportable it seems.
The latest relates to Dandong Port Group as the WSJ reports…
A debt-laden port management company in northeast China defaulted on $150 million in bonds, as highly leveraged businesses get squeezed by Beijing’s campaign to weed out risks in the financial system.
Dandong Port Group Co., controlled by a Chinese construction magnate with political ties in the U.S., told bondholders this week that it is unable to repay part of 1 billion yuan in bonds due Monday.
A company statement cited “heavy interest-bearing debt burdens and high short-term payment pressure” and said it is working with underwriters to repay the investors.
The port, located at the mouth of the Yalu River on the border with North Korea, has expanded energetically in recent years to handle soybean imports from the U.S. and coal from Mongolia, even as much of northeast China’s resource-heavy economy struggled. International sanctions on North Korea have pinched some trade, though a company representative said the port halted business with the country in 2010 and so hasn’t been affected by the restrictions.
The timing of the Dandong default is also noteworthy, coming shortly after PBoC Governor, Zhou Xiaochuan, warning on the sidelines of the Party Congress. Zhou warned about the high level of corporate debt and the risk of a “Minsky Moment.”
“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction., what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”
As WSJ notes, Dandong Port’s default is one of the largest this year…
“The real market is slowly coming out, after the congress,” said Shen Meng, director at Beijing-based investment bank Chanson & Co. “Dandong Group’s problems reflect the lackluster state of the whole Chinese economy and the northeast region.”
Defaults, still rare in China, are expected to increase following that congress, which handed President Xi Jinping a second five-year term and endorsed his broad program to make China a rich world power. To do that, Mr. Xi emphasized that the government will sustain a push begun this year to reduce high levels of debt that might pose a risk to the financial system. Money is increasingly tight for Chinese companies as banks respond to government calls to more closely scrutinize borrower business plans and authorities crack down on riskier financing plays. Yields on triple-A rated five-year corporate bonds are at nearly 5%, compared with 3.9% at the beginning of the year. Chinese firms have defaulted on 35 bond payments this year, compared with 78 last year and 23 in 2015, according to data from Shanghai Wind Information Co.
When asked whether Dandong Port expected the authorities to help, a company representative was non-committal, saying that they have always worked closely with local government. The WSJ provided more details on the default…
Dandong Port’s 1 billion yuan in bonds, issued in 2014, carried a coupon rate of 5.86% in annualized interest. Though the company made the 58.6 million yuan in interest due Monday, it couldn’t meet payment of principal on the bonds, whose investors exercised an option to sell them to the company early. Dandong’s profits have been sliding, and the firm warned about debt risks last year. The company has more than 40 billion yuan in unpaid debt, including several billion yuan in bonds, according to its half-year statement issued in August. It had a 76% debt-to-asset ratio as of last year.
The company’s controlling shareholder, Wang Wenliang, was replaced as Dandong Port’s legal representative this August, although he remains in control of Dandong Port through two corporate entities, one of which is based in Hong Kong, according to company filings.
Our question is whether the Dandong default is part of a post-Congress willingness to allow over-leveraged entities in the private sector to go to the wall. If so, we might see a flurry of similar events in the coming months. Alternatively, was the failure (so far) of the authorities to bailout Dandong part of Xi’s ongoing crackdown on corruption?
Wang Wenliang was implicated in vote-rigging scandal in 2016, as the Journal notes…
A fixture on lists of China’s wealthiest people, Mr. Wang has surfaced in separate scandals in China and the U.S. in recent years. He was one of several dozen deputies from Liaoning province expelled from China’s legislative body last year in a vote-buying scandal. In the U.S., his political funding and other donations have also been scrutinized. His construction business Rilin Enterprises, for instance, gave $1 million to $5 million to the Clinton Foundation since its founding, according to records published by the organization co-founded by the former candidate Hillary Clinton.
A spokeswoman for Mr. Wang put his total donations to the foundation around $2 million. Also last year, The Wall Street Journal reported the Federal Bureau of Investigation had also examined a $120,000 donation by a U.S. business owned by Mr. Wang to then-Virginia Gov. Terry McAuliffe. Mr. Wang has also donated to U.S. universities including Harvard and at least one think tank, the Center for Strategic and International Studies. There is no sign that any of the donations was illegal. Spokesmen for the recipients and for Mr. Wang have pointed out that he has significant business in the U.S.
Whatever the reason for allowing the Dandong default, life is getting tougher for the over-leveraged Chinese corporate sector. From Bloomberg’s take on the Dandong default…
Bond yields in China have surged after central bank governor Zhou Xiaochuan voiced concern about high corporate borrowing on Oct. 15. That sparked a 16 basis point jump in the average yield on AA- rated corporate securities this month, set for the biggest increase since May, according to China bond data. Twenty onshore bonds have defaulted this year, compared with 21 in the same period of 2016, according to Bloomberg-compiled data.
“The rising borrowing costs have eroded companies’ profits and made it more and more difficult to roll over existing debt,” Xu Hanfei and Li Yuze, analysts at China Merchants Securities Co. said in a report Tuesday, commenting on the default.
In the end, debt will out, even in China.