China Vows to Investigate Bond-Market Misconduct

China warned it would show zero tolerance for misconduct in the debt markets, after a series of defaults by state- backed groups unsettled investors.

The warning came from the Financial Stability and Development Committee, a body that groups together China's central bank and other top financial regulators and that is chaired by Vice Premier Liu He, President Xi Jinping's point person on economic and financial issues.

It followed a series of interventions by other actors, including the securities regulator, a stock exchange, and the industry body for the debt industry, as Chinese authorities moved to calm unease that has sent yields on riskier debt to their highest in nearly two years.

Beijing will "investigate and deal with fraudulent issuance, false information disclosure, malicious transfer of assets, misappropriation of issued funds and other illegal activities," the committee said over the weekend after meeting.

It said overlapping "cyclical, institutional and behavioral factors" had fueled a run-up in defaults.

Zhang Xiaoxi, a Beijing-based analyst at Gavekal Dragonomics, said the hawkish message would help stabilize the market and show bond issuers there were huge consequences to defaulting.

Yields on double-A rated corporate bonds--a grade that in China's credit-rating system signals a significant amount of risk--rose to nearly 4.38% on Friday, their highest since January 2019, according to Wind.

The high-profile defaults include one by Yongcheng Coal & Electricity Holding Group Co., a mining company owned by the province of Henan, and another by Tsinghua Unigroup Co., a semiconductor company majority owned by one of China's top universities.

A third involved Huachen Automotive Group Holdings Co., which is owned by another provincial government. It is the parent of Brilliance China Automotive Holdings Ltd., the joint-venture partner of BMW AG in China.

Last week, an industry body that supervises the bond market said it would investigate banks and other intermediaries involved in Yongcheng's debt financing.

Huachen Automotive and some of its intermediaries are separately being investigated by China's securities regulator, while the Shanghai Stock Exchange has reprimanded China Merchants Securities Co., which was the trustee for one of the company's bonds.

After a rapid buildup of corporate borrowing in recent years, China has grown more tolerant of defaults, as it has tried to get investors used to the idea that not all debts will be backstopped by the government. This year, however, many companies have found ways to avoid or minimize defaulting, despite the economic stress created by the coronavirus pandemic.

The recent defaults continue China's "two steps forward, one step back" approach to cleaning up its credit markets, Goldman Sachs analysts Kenneth Ho and Chakki Ting wrote in a note to clients dated Saturday. They said more defaults occur when policy makers give priority to credit cleanup but that authorities can shift into forbearance mode if needed.

Zhang Pan, a credit specialist at Raman Capital, a Shanghai-based asset manager, said there were specific circumstances that helped explain the financial distress at Huachen Automotive, Yongcheng and Tsinghua Unigroup and that a wider wave of defaults was unlikely.

Write to Chong Koh Ping at

  (END) Dow Jones Newswires
  11-23-20 0529ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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