Bond Default ‘Could Occur This Year’ in China; The founder of a domestic ratings agency says fears are mounting and the government may not be able to save the day

05.29.2013 17:27

Bond Default ‘Could Occur This Year’

The founder of a domestic ratings agency says fears are mounting and the government may not be able to save the day

By staff reporter Yang Na

(Beijing) – Calling for attention to the hidden risk in the country’s bond market, a credit rating expert has warned investors that a real bond default could happen this year.

The warning came from Mao Zhenhua, founder of China Cheng Xin International Credit Rating Co. Ltd. (CCXI), a domestic ratings agency. Debt problems are a main trigger of financial turmoil, he said at the company’s annual conference on May 28.There had never been a real default in China’s bond market because the authorities would not allow it, he said, referring to previous incidents of local governments riding to the rescue of faltering enterprises struggling to repay investors.

The bailouts propped up inefficient companies and obstructed the market from optimizing resources allocation, he said.

They also gave rise to “misjudgment by investors of the market risk,” he said. “Investors are led to believe that there is no risk, while in fact the regulators have been overwhelmed” trying to prevent bond defaults.

The China Securities Regulatory Commission (CSRC) has also warned investors about the default risk. Last year, shortly after small and medium-sized enterprises were allowed to issue high-yield private placement bonds, or junk bonds, Huo Da, a CSRC official, told brokerage firms underwriting the bonds to pass on a message to investors.

“Local governments and exchanges will not provide any form of risk relief,” he said. “So don’t have any delusion about a government or exchange bailout. Default by bond issuers is a regular occurrence in the global market.”

Nevertheless, in January, the Shanghai government stepped in to help a troubled solar firm by instructing its debtor banks to defer collecting their loans so the company could have breathing room to prepare for a bond interest payment scheduled for March.

But the expectation was growing that a default was bound to occur this year, and the implications would be significant, Mao said.

A default would disillusion investors and accelerate reforms to the bond market and the credit rating system, he said. “Only after a real default will the capital market be able to discover prices, and we can then come up with reasonable credit ratings and corresponding investors.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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