SOURCE / MARKETS
Founder’s bond default normal as sector becomes more market-driven: expert
Published: Dec 04, 2019 07:23 PM

An employee counts banknotes at a bank in Taiyuan, North China's Shanxi Province, on August 2. Photo: VCG



China's bond sector has become more market-oriented, and the heightened risk of marketization can be controlled, experts said on Wednesday after Founder Group, a Chinese company managed by Peking University, admitted on Monday that it could not redeem a short-term bond by its due date - its first such default.

In a statement on Monday, Founder said that it was unable to redeem its 2 billion yuan ($1.4 billion) short-term (270 days) bond by the due date, and that it would seek to raise the money to repay the debt within the 15-day grace period. China Lianhe Credit Rating Co later on the same day lowered Founder's rating from AAA to A with a negative outlook.

"Since the bond sector is more market-oriented now compared with the past, it is normal to have problems," Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times on Wednesday.

Amid the gloom, another statement from the debt-ridden group on Tuesday gave investors some confidence, and the shares of two Founder subsidiaries rose more than 9 percent. The gains reflected investors' belief that Founder's future seems to be safeguarded by the government. 

According to the arrangements of the central government for the institutional reform of enterprises affiliated with universities, Founder is seeking to attract a state-owned enterprise to be its strategic investor, according to the statement.

Founder is not the only case of a bond default this year. Citing data from Wind, a financial information services provider, in 2015 there was only 23 defaulted bonds and the number in 2016 was 56. But there were 159 defaulted bonds in China this year with a total value exceeding 120 billion yuan, which poses risks for the investors.

But Li said that the higher default ratio is a result of the marketization of the bond sector. That process has been taking place since 2015, when China's central bank ended its rigid redemption requirement - a rule that requires institutions to repay bonds even if the bonds issuers themselves could not afford to pay. 

"In the past, the default rate was low due to administrative interference, which doesn't mean there were no problems in the bond market. As China's economic growth is slowing down, relevant regulators should make it even more market-oriented to encourage its healthy development," Li said.

"A market-oriented bond sector indeed has more risks, but the risks could be diffused by balancing indirect and direct financing, and by diversifying types of investors in the bond market," Luo Yuding, a Shanghai-based financial and equity market expert and independent board director of brokerage firm Sinolink Securities, told the Global Times.

"To diffuse the risk and further develop the bond market, regulators could balance indirect sources including banks and financial institutions, which don't lend their own money, and direct sources such as the securities market," Luo said.