![]() A deal was worked out in just 581 days, compared with an average of 679 in China, noted S& P. That has changed after Peking University Founder Group ( PUFG), a conglomerate linked to China’s top university, defaulted in 2019, many of the terms of its restructuring were made public. State-backed restructurings used to be mired in opacity. Regulators have also grabbed more control over the restructuring process. That lessened investors’ concerns about how they might be treated in a default and, crucially, kept markets liquid even as more firms face distress. Regulators promptly stepped in to make clear to all investors, including foreign ones, that accounting tricks would not stop the company from paying out as much as it could. A probe after the default showed that the company had shifted assets round in an attempt to pay less to some creditors. Take, for instance, the default of Yongcheng Coal in November. Investors involved in such situations say that this is changing. Upon defaulting these groups were often allowed to make inside deals that benefited well-connected creditors but excluded others. One is a tighter grip over unruly companies owned by municipal and provincial governments. They have seized control in two key areas that make defaults easier. But regulators may be more willing to countenance defaults than they were in the past. These risks threaten to shatter the calm portrayed by technocrats in Beijing. Once among the most powerful financial conglomerates in China, it has not published its results for 2020, leading investors to guess at the poor shape of its books and bet on its demise. But now Huarong, a state asset manager with more than $40bn in offshore and onshore debt, seems to be in trouble. Groups controlled by the central government used not to be allowed to face collapse. Its offshore bonds have traded at less than 50 cents on the dollar, indicating that many investors expect a default. A series of missteps and growing regulatory pressure has led to a collapse in investor confidence. Evergrande, a troubled property giant, is on the hook for more than $100bn in interest-bearing offshore and onshore debt. That figure has climbed to nearly 9bn yuan this year, reckons S& P, a rating agency. Defaulting groups had on average about 1bn yuan in outstanding onshore bonds in 2015, a year after China experienced its first default in recent times. More worrying, however, are the size and profile of some struggling companies. China Fortune Land defaulted on a $530m bond in February, in what was the country’s largest-ever default by a property developer Chongqing Energy Investment, a state-run firm that produces most of the city of Chongqing’s coal, defaulted in March, denting confidence in local authorities’ support for state-owned groups. Defaults in China’s onshore bond market have climbed to a record, with companies missing payments on about 97bn yuan in principal in the first half of 2021, up by almost 50% compared with the same period last year, according to Wind, a data provider. ![]()
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