Rising funding costs may tip weaker China SOEs into default: S&P
BEIJING - Diverging funding costs could indicate that more defaults are on the way for China's weaker State-owned enterprises, according to S&P Global Ratings in a report published today.
As China's economy normalises in the wake of the COVID-19 shock, local governments will likely become more selective in their support for State-owned firms," said S&P Global Ratings China Country Specialist, Chang Li.
"We believe companies with higher average funding costs, worsening leverage, unclear holding structures, and less policy-oriented business will be most vulnerable to credit-event risk.
"Our data show that 20% of one-year bonds freshly issued by SOEs face a 100-basis point premium over median SOE yields.
"The funding differentiation reflects higher SOE credit risks," a trend that could keep funding costs high for weaker SOEs, and damage their access to the domestic bond market."
Since mid-2019, a number of high-profile China SOEs have defaulted, including Tewoo Group and Qinghai Provincial Investment Group (QPIG). "Last month, Tianjin Real Estate Trust Group failed to repay onshore debt, a reminder of the pronounced credit risk for indebted Tianjin SOEs," Li said.
"Rising economic uncertainty is one key factor behind increased selectivity in government support to SOEs. China's State-owned universe is quite wide, with varying degrees of policy roles.
"Some types of SOEs have unclear ownership and shareholding structure or linkages with (such as limited supervision) their Government owners. We view these SOEs as unlikely to receive much or any support in the event of distress.
"This has proved to be the case in past credit risk events including Peking University Founding Group this year, and China Huayang Economic and Trade Group Co. Ltd. in 2018."