China Bond Default Shock Prompts NAFMII Underwriter Probe

Haitong Securities, Industrial Bank, China Everbright Bank, Zhongyuan Bank are suspected of violations, as recent defaults prompt concerns over the health of SOEs.

NAFMII (National Association of Financial Market Institutional Investors) is alleging that one of China’s largest brokerage firms, Haitong Securities, as well as its subsidiaries, facilitated the illegal issuance of bonds and manipulated the market, Reuters reports.

In a statement on Wednesday (18 November), NAFMII says Haitong and its subsidiaries helped state-owned coal miner Yongcheng Coal & Electricity Holding Group illegally issue bonds. The company shocked the market last week by defaulting on CNY 1 billion (USD 152 million) worth of debt, just weeks after the issuance.

Yongcheng is said to be seeking investors’ agreement to extend the term of the bonds it is unable to repay, to avoid triggering defaults on a further CNY 26.5 billion of debt owed by the company and its parent.

Besides illegal bond issuance and market manipulation, Haitong Securities is also suspected of other violations involving interbank corporate debt instruments and exchange-traded corporate bonds, though NAFMII did not provide additional details.

According to Caixin, Haitong holds large positions in more than CNY 40 billion of bonds issued by Yongcheng, its state-owned parent Henan Energy, and Chemical Industry Group.

NAFMII said that it would impose strict sanctions and refer Haitong to “relevant departments for further handling” if the investigation revealed the existence of market manipulation or other “bad behaviour”.

In a filing to the SSE (Shanghai Stock Exchange), Haitong said it would “actively cooperate” with the investigation and strictly implement NAFMII’s requirements on the issuance of debt financing instruments. Haitong is the sixth-largest bond underwriters in China by value for the year so far, having underwritten 1,562 bonds worth CNY 436 billion since January.

NAFMII is also said to be investigating whether Yongcheng had properly disclosed its risks, after the company was found to have transferred core assets to its parent company at zero cost in the days leading up to the default.

On Thursday (19 November), NAFMII also said it was investigating suspected violations by three of Yongcheng’s underwriting banks – Industrial Bank, China Everbright Bank and Zhongyuan Bank – as well as credit rating agency China Chengxin International Credit Rating and accounting firm Xigema Certified Public Accountants.

Bond market stress

Recent defaults by Yongcheng, automaker Huachen Automotive Group (CNY 6.5 billion default) and chipmaker Tsinghua Unigroup (CNY 1.3 billion default) – all government-backed entities – have sparked a sell-off in China’s corporate debt market amid uncertainty over the health of state-owned enterprises and their lenders.

This prompted the PBOC (People’s Bank of China) to inject CNY 800 billion of one-year funds into the interbank market via its MLF (medium term lending) facility on Monday (16 November). CNY 600 billion of this was used to roll over MLF loans that matured this month.

Adding to the stress, lenders are also due to repay at least CNY 3.7 trillion of short-term interbank debt and allocate CNY 1 trillion to buying newly issued government bonds by end-2020, while also having to navigate maturing policy loans.

On Tuesday (17 November), NDRC (National Development and Reform Commission) spokesperson Meng Wei said local governments will be required to carry out stricter supervision over corporate bonds, establish a cross-department coordination mechanism, improve information disclosure and further unify disclosure rules.

A prevention and control system will also be put in place to help identify, discover and handle cases as early as possible, while plans to reduce market risks shall be formulated, Meng said.

Bailouts are unlikely, however, as China’s government has been seeking to remove implicit guarantees normally expected by the market.

According to a  Fitch report released on Monday, defaults among China’s state-owned enterprises are expected to rise “marginally” in 2021, amid tighter funding conditions, increasing risk aversion, and a shift by the PBOC towards a more neutral policy stance.

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