Fund managers who applauded what they thought was the first default of a Chinese state-owned enterprise (SOE) were left dismayed by reports of a last-minute bailout.
Fund managers such as Teresa Kong of Matthews Asia applauded the apparent default, saying it would help instil greater market discipline and better capital allocation in future.
However, mainland Chinese media are reporting that China Construction Bank, which underwrote and invested in Baoding Tianwei Group’s bonds, will provide undisclosed loans to help the firm meet its payments.
“This perception of implicit state support has arguably caused the market to systematically under-price the debt of SOEs relative to their private counterparts, all else being equal,” said Kong in her note. “Just like other goods priced too cheaply, demand goes up, causing SOEs to take on too much leverage.”