Defaults May Finally Have Changed Sentiment

Sentiment should have shifted years ago, by 2014 at the latest, but:

Toxic debt troubles have long been a fact of life among state and private companies that raise money on China's bond markets. But the problems have been papered over by government support.

...The market is not used to hearing about firms' debt problems. And because they trust government bailouts, many investors until recently accepted the lack of financial transparency among bond-issuing companies.

They apparently did not mind that bond underwriters "changed contact persons frequently" and made it "hard for investors to find" valid information when problems arose, said a money market manager. Moreover, the manager said, "underwriters can't get timely information updates from the company."

Several bond market experts said that in the past investors cared more about whether an issuer was government-connected than information disclosure. But now, one said, this attitude "is neither prudent nor mature."

Now the change in sentiment may have finally arrived as the full weight of the situations comes into view.

Caixin: Market Jitters as Bonds Edge toward Toxic

CRM's unexpected decision rattled investors, said one bond trader, and suggested debt problems may be putting more pressure on companies and the bond market than previously thought. The trading halt intensified the risk fears brewing since the Yunfeng and Sinosteel woes surfaced.

CRM's bond situation "will have negative impact" on new bonds issues "and pricing," the trader who asked not to be named said. "If state companies continue doing so, more companies will have trouble issuing bonds due to rising financial costs."

Alarmed by the state of affairs for bond investing, Chinese banks, fund managers and insurance companies have been pulling back on bond investments, the investment bank China Investment Corp. (CIC) said on an April 10 report.

Market anxiety has already forced some companies to scuttle bond plans. Some 49 bond issues were cancelled in March, Guotai Junan Securities reports. Another 20 were scratched from April 1 to 12.

Possible sell-off coming in late May or June?

"The widening gap between bank wealth management asset yields and debt costs has become a source of systemic risk," warned a GF Securities report in March.

So far, though, credit rating agencies have declared the bond market generally safe, if subject to sporadic risks.

But CRM's woes and fears that other companies may follow suit are behind a rising tide of fear among analysts of mounting problems.

When credit rating agencies release their next wave of bond rating results in June, say skeptical analysts, many bond products could be downgraded. And downgrades could trigger sell-offs.