Business / Economy

China's tolerance for small SOE defaults to rise

(Xinhua) Updated: 2015-04-23 09:54

BEIJING - China's large state-owned enterprises (SOEs) could become more tolerant of failures of their non-strategic subsidiaries and affiliates as financial reform progresses, global rating agency Fitch said Wednesday.

"Defaults by non-strategic, commercially unviable SOEs can help to instill greater market discipline and reallocate capital more efficiently within the economy," Fitch said in its latest report.

Fitch expects defaults by SOEs to become more common in China's corporate bond market, but still sporadic and isolated, as controlling systemic risk remains a top priority for the Chinese government as economic growth slows.

The report came after Baoding Tianwei Group Co, Ltd failed to meet a bond coupon payment due on April 21, indicating that SOEs are no longer shielded from credit events in China's bond market.

Baoding Tianwei is a Chinese electric equipment and solar manufacturer and is a wholly owned subsidiary of China South Industries Group Corporation, one of China's largest military defense companies and wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC).

China's corporate bond market has witnessed a few credit events, including those by Shanghai Chaori Solar Energy Science and Technology as well as Cloud Live Technology Group. However, SOEs still broadly benefit from the perception of implicit state support, allowing them to obtain lower-cost funding than privately owned companies, said the report.

Fitch said a default from a relatively small and non-listed state-owned entity that is indirectly held by SASAC with low strategic importance to its SOE parent fits with the government's aim to allow isolated financial risk and give market forces a larger role in the economy.

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