China has decided that “now” is probably a good time to start developing a more reliable, standardized approach to handling bond defaults.
A statement posted to the PBoC’s website on Wednesday details what was discussed at a Tuesday pow wow which, in addition to central bank officials, included personnel from the securities regulatory body and the supreme court.
According to the statement, quite a bit of “thorough studying” went on at the symposium. Here’s a translation:
On December 24, 2019, the Supreme People’s Court, the People’s Bank of China, the Development and Reform Commission, and the China Securities Regulatory Commission jointly held a national forum on the trial of bond disputes in Beijing. The symposium thoroughly studied and implemented the spirit of the Fourth Plenary Session of the 19th Central Committee of the CPC and the Central Economic Work Conference. Based on the bond market and judicial practice exchange discussions, it studied the role of trial functions, improved the mechanism for bond default treatment, and promoted the sustainable and healthy development of the bond market in accordance with the law.
Zhou Qiang, president of the Supreme People’s Court, attended the symposium and pointed out that the bond market is an important way of direct financing and an important part of a multi-level capital market system. General Secretary Xi Jinping issued a series of important speeches and instructions on deepening the reform of the financial system and promoting the healthy development of the multi-layered capital market, which pointed out the direction for the people’s courts to try bond disputes and strengthen the construction of the rule of law in the bond market, and provided fundamental compliance.
It’s hard not to chuckle, but this is far from funny – at least if you’re a creditor in the world’s second-largest bond market.
Defaults are on track to touch a record this year, and although that ostensibly helps make the case that China is becoming a more liberalized economy where market forces are allowed to work their “magic”, it also raises the specter of a destabilizing wave of defaults.
Given the mind-boggling array of cross-holdings embedded in some corners of the market – not to mention the impossibly opaque, ad hoc nature of resolutions, extensions and other mitigating measures taken when a debtor misses a payment – it’s impossible to fathom what a true default cycle might look like in China.
“Under-the-table repayment arrangements are not uncommon in China after companies failed to honor their debt obligation”, Bloomberg notes, citing the prioritizing of compensation for retail investors, repayment of offshore debt over onshore notes and “another trick” which involves “negotiat[ing] payment extension with creditors via private discussion in lieu of resolving it through the clearing house”.
As alluded to above, this is all complicated immeasurably by ambiguity about when and where the government will prevent defaults and whether guarantees are or aren’t ultimately backstopped by Beijing. We detailed this extensively in the linked post below.
Read more: Mind-Boggling Local Government Debt Dynamics Should Probably Worry China Watchers In 2020
Earlier this week, beleaguered HNA Group managed to make a 1.3 billion yuan payment on a bond due Tuesday, much to the relief of nervous markets which had been rattled by a trading halt in the note from December 6.
An affiliate, Haikou Meilan International Airport, has defaulted twice and will delay a payment due later this month in order to make sure it has the funds to bankroll an expansion, apparently.
HNA Group – the conglomerate – missed a payment on a private issue earlier this year. Tuesday’s payment averted what would have been the first default on a public issue.
