China’s central bank could intervene after ‘glaring’ state-firm bond defaults, analyst says

A man wears a protective mask as he rides past the The People’s Bank of China in Beijing.

Emmanuel Wong | Getty Images

SINGAPORE — The People’s Bank of China (PBOC) could step in following a number of recent bond defaults by Chinese state-linked firms, according to Bank of Communications International’s Hao Hong.

“In the past couple of weeks the default situation is somehow getting glaring,” Hong, managing director and head of research at the firm, told CNBC’s “Street Signs Asia” on Friday.

“I wouldn’t be surprised to see the PBOC intervene from here,” he said.

Earlier in November, state-owned coal miner Yongcheng Coal and Electricity defaulted on a 1 billion yuan (around $152.01 million) bond, catching investors off guard given the firm’s AAA-rating by a domestic agency. Other high-profile debt defaults followed, including government-backed chipmaker Tsinghua Unigroup.

Hong said it’s in the Chinese central bank’s “best interest” to maintain sufficient liquidity to avoid “systemic risk.”

The PBOC previously warned in its financial stability report that factors such as a reliance on borrowing to make debt repayments by some large firms could present a risk to the entire economy, according to CNBC’s translation of the Mandarin-language text.

“I think recently the corporate default is catching a lot of people’s attention,” the analyst said. “I would say that, you know, it is concerning because it’s coming from (state-owned enterprises) but then at the same time, it’s a relatively small amount in a very large market.”

Asked when concerns over the bond market could subside, Hong highlighted a “very large bid from unknown buyers” going into the market yesterday to “shore up” the questionable bonds — an activity usually associated with government-related entities.

He also compared the situation to China’s “unprecedented liquidity crisis” in 2013, when money market rates soared and short-term rates touched record highs.

“During that time, overnight interest rate was hitting almost 50%,” Hong said. “We haven’t seen that kind of level for interest rate for years and years since then.”

— CNBC’s Weizhen Tan and Yen Nee Lee contributed to this report.

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