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.