China defaults

[Doug Henwood]

[Henry, anyone - how serious is this?]

Wall Street Journal - February 1, 1999
 
MORE GUANGDONG FIRMS DEFAULT ON BOND PAYMENTS

By Craig S. Smith And Karby Leggett
Staff Reporters of the Wall Street Journal

GUANGZHOU, China -- At least six state-owned companies in southern China's
Guangdong province have defaulted on domestic bond issues, extending the
recent string of defaults that have burned foreign bankers and
international bondholders.

While the total amount of debt involved -- apparently less than 500 million
yuan ($60 million) -- is only a fraction of the $4.3 billion owed by
now-bankrupt Guangdong International Trust & Investment Co., the defaults
show that financial strains spooking international financiers are also
taking their toll on China's domestic bond buyers.

And that could be bad news for China. The country is depending on its
people to finance a government spending spree and offset slowing exports
and foreign investment. Much of that spending is being paid for with bonds
sold either to China's state-owned banks or directly to individual
investors. With unemployment rising and economic growth already expected to
slow to 7% this year from 7.8% in 1998, Beijing can ill afford a domestic
crisis of confidence.


Severe Cash Needs

"This could undermine the Guangdong provincial government's ability to
raise funds in the domestic bond market," says Dong Tao, senior regional
economist for Credit Suisse First Boston in Hong Kong. Guangdong province
is facing severe cash needs as it struggles to bail out bigger troubled
state-owned companies. Last week, the province's executive vice governor,
Wang Qishan, said Guangdong may inject as much as 30 billion yuan into
Guangdong Enterprises Ltd., the province's main investment arm in Hong
Kong. That's equal to half Guangdong province's government revenue last
year.

Guangdong Enterprises is in restructuring talks with bankers after
announcing in January that it lacked sufficient cash flow to repay on time
debts totaling $2.94 billion. On Friday, the Hong Kong Monetary Authority
urged the company's creditors to cooperate in the talks lest the company's
failure trigger a rush to call loans at other Chinese-backed firms in the
former British colony -- an event that some economists say could send Hong
Kong's economy plunging into a black hole.

"Given the volume of maturities due this year, aggressive collection
actions will only be counterproductive and make the situation even worse
for everyone," said the monetary authority's deputy chief executive, David
Carse, in a letter to Guangdong Enterprises' bankers.


Company Can't Pay

The largest of the recent domestic bond defaults in Guangdong province was
by Maoming Qinghua Co., an acrylic-fiber maker apparently owned by the city
of Maoming in southern Guangdong province. Guangdong Securities Co., which
underwrote the three-year bond, said the issue totaled "more than 100
million yuan."

"Now the Maoming city government is telling us the company simply doesn't
have the resources to pay investors, and the city government can't help
either," said a woman in Guangdong Securities's investment banking
department who gave her name as Ms. Han. She declined to give her full
name. A Maoming city government official said a "working group" is
considering putting the company into bankruptcy or merging it with another
enterprise.

The defaults also raise questions about how many local-currency bonds were
sold to domestic investors and who stands behind them when local
government-owned companies fail. The Maoming bond was approved by the
Guangdong branch of China's central bank, the People's Bank of China, but a
recent restructuring of the bank has removed that power from its provincial
branches. "Now it's hard to say who should be responsible for the matter,"
said an official in the information office of the central bank's Guangdong
branch.


Cash-Flow Problems

Other companies that have missed bond payments include Huizhou Yinshan
Development Co., Foshan Fenjiang Industrial Co., East River Power Corp.,
Yanjiang Hi-tech Base Construction Development Corp. and the Wu Hua Meishan
Cement Factory -- all apparently owned by city or county governments in
Guangdong.

Liu Wuming, a manager in Guangdong Securities's investment-banking
department, said that all the companies are experiencing cash-flow problems
and that "repayment is just a matter of time." A notice posted at one of
Guangdong Securities's branch offices, for example, notifies investors that
repayment of principle for Yanjiang Hi-tech Base Construction Development's
five-million-yuan one-year bond will be postponed for a year. Interest
payments will be postponed for three months. None of the companies could be
reached to comment.

But that isn't good enough for investors, many of them retirees, who put
their money into the bonds. "My father put his life savings into those
bonds. He needs his money back," argues a woman outside the brokerage firm.
Guangdong Securities said it hopes the defaults wouldn't be publicized.