China should let the market play a bigger role in dealing with bond defaults and local governments should reduce support for defaulting firms, a newspaper owned by the country's central bank said in a commentary on Saturday. If not, investors will lose the ability to assess real risks and fail to solve real problems, and issuers should not maliciously default on debt which will destroy market order, the Financial News newspaper said.
The central government will continue using market and legal ways to deal with "zombie" companies and insolvent state-owned enterprises as Beijing aims to press ahead with supply-side reform, it added in the commentary. China has seen a growing number of bond defaults over the past two years but investors have made relatively small losses after repayment deadlines were extended or restructured.
A media report on Tuesday cited anonymous sources who said Liaoning provincial officials were petitioning the central government to permit Dongbei Special Steel to use debt-to-equity swaps, which the central government has mooted as one solution to China's corporate debt problem.
Dongbei Special Steel Group Co Ltd, an unlisted Chinese steelmaker, has defaulted on at least seven debt instruments this year, causing headaches for one of its primary debt underwriters, China Development Bank, and the provincial government of Liaoning which owns the firm.
Chinese local governments are grappling with financial difficulties and do not have the ability to help enterprises to pay their debt, the commentary said. It added that the lead underwriter should urge enterprises to pay debt and take responsibility for making compensation to investors. The state planner said in June that China's debt defaults will not pose a systemic risk as long as economic growth remains within a reasonable range and corporate leverage ratios even have room to rise if economic growth falters.