Chinese group asks for $7bn government bailout - Financial Times

May 7, 2018

Chinese group asks for $7bn government bailout
DunAn warns of ‘systemic risk’ in plea to Zhejiang provincial authorities

DunAn Group letter blamed the country’s war on debt for fundraising difficulties affecting the company © Bloomberg

Gabriel Wildau in Shanghai
In a test of Chinese authorities’ commitment to reducing financial risk, a large Chinese manufacturing group has begged for a government bailout to avoid default on up to $7bn in debt after a regional lender withdrew loans.

Over the past year, China has tightened credit in a bid to tackle an explosion of corporate debt that the International Monetary Fund has called “ dangerous ”. But the plea highlights how painful Beijing’s deleveraging campaign has been for some indebted groups.

The letter from privately owned DunAn Group, seen by the Financial Times, appeals directly to government concerns about financial stability in asking for officials to intervene with banks to resolve a liquidity crisis. DunAn has Rmb45bn ($7bn) in outstanding debt, according to the letter.

“If a credit default happens, it will deliver a serious blow to many financial institutions in Zhejiang and may even cause systemic risks,” said the letter from DunAn to the provincial government of prosperous Zhejiang province on China’s east coast.

The letter blamed the country’s war on debt — described using military terminology as a “siege against heavily fortified positions” — for fundraising difficulties affecting the company, leading to “extremely serious liquidity difficulties”.

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However, Ai Tangming, chief economics commentator for Sina Finance, a Chinese news portal, said: “As the deleveraging campaign gathers force, more companies will face liquidity crises and ask the government for help, but the government has to maintain its focus on market-based principles,” he said.

“Key local enterprises generate employment and tax receipts. They’re like the business card for local officials. So that’s why local governments use subsidies and other methods to keep them alive,” he added.

According to Caixin, a respected Chinese financial news website, the crisis involving DunAn began when Zheshang Bank, a regional lender in Zhejiang, demanded early repayment of loans, causing other banks to restrict lending to the group.

DunAn employs 29,000 workers and manufactures a range of equipment including air-conditioning parts, civil explosives and wind power equipment. It has also expanded into asset management and real estate.

$7bn

DunAn’s outstanding debt, according to the letter

Last week, DunAn Artificial Environment Equipment, one of two Shenzhen-listed units of the group, cancelled a planned bond issuance worth Rmb12bn. Dunan Artificial and the other listed unit, Jiangnan Chemical Industry, have both suspended trading, and the company’s exchange-listed bonds are suspended.

The Zhejiang provincial financial affairs office last week convened a meeting with a group of creditors including China Development Bank, the “Big Four” commercial banks — Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China — and three state-owned bad-loan banks — Huarong Asset Management, Cinda Asset Management, and Great Wall Asset Management.

The purpose of the meeting was to resolve “urgent issues” related to debt owed by DunAn, according to a separate document seen by the FT.

Though Chinese local governments sometimes directly use fiscal resources to conduct bailouts, a more common method is to exert pressure on banks to offer bridge loans or forbear collection of existing debt.

Government bailouts are most common for state-owned companies, but officials have also rescued private groups when their potential collapse raised the prospect of contagion.

The Shanghai government shielded investors from losses on bonds from privately owned Chaori Solar, whose 2014 default was the first in China’s domestic bond market.

Regulators last month deployed an insurance-industry rescue fund to inject capital into Anbang Insurance Group, whose chairman is awaiting the verdict of his trial at the end of March on charges of embezzlement, which he originally denied, although a court summary said he expressed “deep remorse” for his actions during the hearing.

DunAn Group declined to comment. The Zhejiang financial affairs office could not be reached for comment on Monday.

Additional reporting by Yizhen Jia