When China Fortune Land Development missed a payment on a $530m US dollar bond in February, the property developer did not rush to tell its investors.

“They never even said ‘we defaulted’,” recalled one of the company’s offshore investors, who only found out via a third-party trustee. The investor added that advisers to China Fortune, whose bondholders include BlackRock and HSBC, said they would have to wait for onshore debt obligations to be taken care of first.

China Fortune, which builds industrial parks and owes a further $4bn, is one of a series of big companies in the country that are coming under repayment pressure as Beijing tightens credit conditions. With more than $100bn of dollar debt borrowed by Chinese companies on international markets coming due this year, global investors are on edge.

Last year, Chinese companies defaulted on a record $7.3bn of offshore dollar debt and $22.7bn worth of renminbi-denominated bonds. In 2021, they have missed payments on almost $3.3bn in dollar bonds, according to rating agency Fitch, or as much as was expected in a full year before the pandemic.

Among the other names that investors are fretting over is Peking University Founder Group, a state-backed conglomerate that owes billions of dollars in offshore debt and is being restructured.

China Fortune declined to comment.

Those pressures come as Beijing seeks to balance a strong economic recovery from Covid-19 with high levels of indebtedness. “It’s quite clear the Chinese government wants a more rational credit market,” said Jimmy Lim, chief executive of Modular Asset Management, a Singapore-based hedge fund.

The prospect of defaults has also forced international investors to reassess how much Chinese government support financially stretched companies will receive. Foreign investors have long assumed that Beijing would bail out state-backed groups.

Concerns around government support have been fuelled by the situation at China Huarong Asset Management, the country’s largest distressed debt manager, which owes $22bn in dollar-denominated debt. The price of some offshore bonds issued by the group, which is majority-owned by the finance ministry, collapsed to as low as 57 cents on the dollar last month after it delayed releasing its 2020 financial results. The company’s former chair was executed in January for financial crimes.

The same Huarong bonds are now trading at 66 cents on the dollar.

Chinese issuers face their largest-ever wave of dollar bond maturities this year at $118bn, according to Refinitiv. But even that is dwarfed by the Rmb7.8tn ($1.2tn) of onshore debt maturing in 2021. The latter figure could have big repercussions for offshore bondholders, especially if the restructuring of onshore debt is prioritised.

“What’s going to happen onshore will clearly drive what’s going to happen offshore,” said Soo Cheon Lee, founder and chief investment officer of SC Lowy, a Hong Kong-based distressed credit manager. In the case of China Fortune, he added, “even the onshore guys are struggling to figure out what’s going on”.

The restructuring process in China can be slow. More than one-fifth of companies that have defaulted since the start of 2018 have not completed restructuring, said Shuncheng Zhang, associate director of China corporate research at Fitch.

Onshore defaults are usually resolved through China’s courts, Zhang said, meaning that they take far longer than the out of court agreements offshore bondholders usually prefer.

The case of China Fortune has been complicated by the presence of powerful onshore investors. Ping An, one of the world’s largest insurers, is both an investor and a member of the property group’s creditor committee. Other committee members include China’s national banking and insurance regulator and the cash-strapped government of Hebei province, whose failure to pay China Fortune for work on infrastructure projects helped bring about its default.

Offshore bondholders that collectively hold more than $1.5bn in China Fortune debt have formed their own committee.

Ping An suffered a $2.8bn hit from its exposure to China Fortune via debt and equity in the first quarter. An analyst at a global rating agency said that as a result, regulators might also reconsider how much exposure to property Chinese insurers should carry.

That would further drain liquidity from developers, which account for the majority of annual Asian high-yield bond issuance, according to S&P.

SC Lowy’s Lee called the recent rise in missed bond payments “ironic, since China’s economic data are fantastic”. Despite strong economic growth, he said, Beijing’s reluctance towards bailouts meant the recent spate of defaults was likely to last years.

However, Lee said the government would take measures to limit losses for offshore bondholders, given global investors are an important source of dollar financing for Chinese companies.

China, he said, “cannot just squeeze the offshore guys, because a lot of China Inc still needs offshore funding as well”.



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