- China’s market regulator, the Financial Stability and Development Committee (FSDC) has increased its probe into bond sales after businesses defaulted on payments.
- The missed payment from Yongcheng Coal & Electricity Holding last week impacted the Chinese credit market.
- The default led to further from state-linked companies, considered resistant to such incidents, causing a selloff in bonds and deals to scrap.
Following payment default from a state-backed coal miner, China’s market regulator, Financial Stability and Development Committee (FSDC) has intensified its investigation into bond sales. The default dragged in several banks, accounting firms, and rating agencies.
The National Association of Financial Market Institutional Investors (NAFMII), an interbank market watchdog supervised by China’s central bank, stated that Industrial Bank Co Ltd, China Everbright Bank Co Ltd, Zhongyuan Bank Co Ltd, China Chengxin International Credit Rating, and Xigema Certified Public Accountants were investigated for alleged irregularities. Last week, Haitong Securities Co Ltd was brought under investigation.
What was the investigation around?
The investigation was around the deals for Yongcheng Coal & Electricity Holding Group Co Ltd that missed the payment in the previous week, which impacted the Chinese credit market. This default was followed by the ones from state-linked businesses, that were believed resistant to such credit events, as the government supported them. These defaults resulted in the selloff in bonds with a few deals to get cancelled.
Now, the officials from China’s State Council have asked the government department to conduct a risk assessment to ensure stability in the financial market and prevent any spill that could result in systematic risks.
Why is Yongcheng Coal being investigated?
Yongcheng Coal and Electricity Holding Group Co. Ltd is into the business of mining and distributing coal products. The Company produces brown coal, coking coal, and bituminous coal products, among others.
The authorities investigated the business for the possible violations after failing to pay on a CNY 1 billion (~US$ 152 million) short-term note. As a result, its long-maintained credit rating of AAA was downgraded.
Other Asian Countries
In 2020, Taiwanese businesses increased their investment in China. The total approved investment from Taiwan to China rose to US$4.7 billion within the first ten months of 2020. After excluding Mainland China, outbound investment increased by 19% to US$7 billion.
However, as most of the economies were adversely impacted by the outbreak of COVID-19, China is retaining its request for many Taiwanese businesses to bring back investment. A few of these Taiwanese companies have switched their businesses back across the strait.
FSDC in Action
China’s Financial Stability and Development Committee (FSDC) is in action to investigate the misconduct by the bond issuers. There would be zero tolerance in case of any wrongdoing, and there would be severe punishment in case the laws and regulations are violated.
The step follows after the series of high-profile defaults which hit China’s corporate bond market. NAFMII would launch probe into two state borrowers along with their underwriter and issue new rules for the interbank bond market.