Bonds Apr 28

Shanxi battles China's infamous north-south wealth divide

Officials in northern province have restructured dozens of local businesses operated by the state and battled to repay bonds since a coal company default created panic in the market last November; they have vowed to repay all debts

Shanxi battles China's infamous north/south wealth divide
A worker walks on a road between giant piles of coal in Changzhi in Shanxi province. Provincial officials have struggled to rejig operations and stabilize the local economy since a major bond default in November 2020. File photo by AFP.

(ATF) Analysts with Nomura did a special report this week on China's infamous north-south divide, saying they expect recent property sector tightening and environmental policies to widen the economic disparity between the country's northern and southern regions.

In their report, Nomura analysts Ting Lu, Lisheng Wang and Jing Wang said the regional disparity "has been made more evident in recent years by the delinquencies and repayment pressures in debt markets".

"We expect this divide to worsen further as policymakers rein in property market financing and enact carbon neutral environmental policies.

"The widening north/south divide could result in a vicious cycle of rising defaults and slower growth in North China. Though we do not expect a national crisis, markets should be prepared for more defaults.

"Beijing is unlikely to ease restrictions on property market financing, but may adjust some of the overly harsh anti-pollution measures, and might step up fiscal transfers to North China.

"For bond investors, risk premia for debt issued in North China are rising rapidly, and investors will need to closely monitor markets as risks unfold."

Their forecast appears in line with the thinking of other analysts. However, it is worth noting that officials in some parts of the north, such as Shanxi province, have working desperately to bolster the outlook for local enterprises.

Shanxi bid to calm investors' nerves

In the first quarter of this year, officials in charge of state assets in Shanxi were reported to have redeemed bonds totalling more than 80 billion yuan, and did not allow a breach of contract.

According to 21st Century Business Herald, on April 21, Shanxi State's Assets Operation Company and Shanxi Provincial Finance Office jointly organised a survey of financial institutions involved with businesses in the state. Participants called this the Shanxi Credit Evaluation Conference.

The official in charge of Shanxi State-owned Assets said that the province has, since 2017, firmly maintained a bottom line on risk safety. Through measures such as early warning and credit enhancement, businesses in the province have rigidly redeemed a total of 757 billion yuan (nearly $117 billion) in bonds due. From January to April this year, more than 80 billion yuan in bonds were "rigidly redeemed under extremely difficult capital conditions". 

Many officials in Shanxi said they would ensure there is no default on the bonds issued by Shanxi provincial enterprises.

Shanxi has since last year launched a new round of state-owned enterprise reforms, implementing strategic and professional reorganisation in important areas, reshaping and optimising the structure of state-owned capital. Some 28 provincial groups were reorganised and integrated into 18 key backbone enterprise groups. In the process of integrating and reorganising coal businesses, changes were made in the scale of corporate assets, along with adjustments of claims and debts, and inevitable redistribution of assets and liabilities.

The person in charge of Shanxi state-owned assets insisted that with the gradual transfer of assets, provincial enterprises will soon have a clear balance sheet. Liabilities were only netted between provincial enterprises, with the debts of provincial enterprises to financial institutions still borne by the original enterprise, so there was no problem of debt evasion caused by asset transfer.

Boosting confidence in Shanxi bonds

The issuance of coal corporate bonds in Shanxi Province was blocked after Yongmei’s bond default, which triggered a wave of bond issues to be cancelled last November.

In the first quarter, credit bonds issued by Shanxi only saw 51.22 billion yuan, a year-on-year decrease of 61%. However, urban investment bonds were issued on a large scale in the first quarter of this year. The smooth financing of these has undoubtedly enhanced Shanxi's financial strength, and increased confidence that Shanxi's State-owned Assets will not permit a bond default. That attitude will to help boost investors' confidence in the bond market.

So, Shanxi has made a lot of effort after the coal company bonds fell sharply due to the default of Henan Yongmei (the bond price once fell to 65 yuan). And to stabilise bond prices of Shanxi coal enterprises, the provincial government has organised local financial institutions to buy discounted bonds of businesses owned by the province this year, and bond prices have clearly stabilised.

The central bank's Taiyuan Central Branch has also developed and launched a “Monitoring and Early Warning System for Debt Financing Instruments of Non-financial Enterprises”. The system can figure out the solvency and redemption risk of debt issuing companies in the province three months in advance, to provide continuous and "dynamic" monitoring results to decision-makers, and improve the accuracy of risk warnings.

The official in charge of Shanxi State-owned Assets also gave investors a reassurance that no matter how the assets are transferred, they will not evade debts.


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China north-sound divide wealth disparity Yongmei bond default Shanxi province provincial restructuring coal companies bond market