China warns it has ‘zero tolerance’ for misconduct in debt market after default shocks

Published (HKT): 2020.11.23 06:00

Chinese authorities vowed to punish market misconduct following a series of high-profile defaults on bonds that have undermined investor confidence in financial disclosure and an assumed guarantee of government backing for state-owned corporate borrowers.

At a Saturday meeting chaired by Vice Premier Liu He, the Financial Stability and Development Committee said that it had “zero tolerance” for issues such as false information disclosures, malicious transfer of assets, misappropriation of issuance funds, and fraudulent sales of bonds.

“Debt evasion” will be severely punished, and prevention and warning systems will be strengthened to limit systemic risks, the committee said. Companies should also maintain reasonably ample liquidity, it added.

State-owned Yongcheng Coal and Electricity last week defaulted on a bond with a face value of a billion yuan (US$152 million), triggering an investigation into possible misconduct at the three banks that arranged the sale.

The move was followed shortly by chipmaker Tsinghua Group, also known as Unigroup, failing to pay back a 1.3 billion yuan bond. Huachen Automotive group, a state-owned joint venture partner of BMW, also defaulted this week.

The string of defaults sent shock waves through China’s corporate bond market, with investor confidence falling and funding costs spiking for corporate borrowers.

The committee attributed the defaults to cyclical, institutional and behavioral factors — but added that the market was robust overall.

China has seen 109 defaults this year involving 126 billion yuan of bonds, according to Wind Information.

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