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China's bond market is likely to be stricken by a second case of stated-owned enterprises (SOE) bond default following Baoding Tianwei Group's declaration of default in April.
Both China National Erzhong Group and its subsidiary China Erzhong Group (Deyang) Heavy Industries announced on Tuesday that they might be not able to repay the due interests or principals on bonds they had issued.
China National Erzhong Group may fail to meet a bond coupon payment due on September 28, with the value reaching 56.50 million yuan, while China Erzhong Group (Deyang) Heavy Industries may also default on its debts expiry on October 14.
"Though market players have already predicted the debt default risks faced by the two companies, if final default occurs, the event will still deal a heavy blow to the debenture market," said Xu Hanfei, chief bond analyst with Guotai Junan Securities.
In fact, China National Erzhong Group has been suffering from sustained losses since 2011 and defaulted on bank loans several times.
Its subsidiary China Erzhong Group (Deyang) Heavy Industries also saw shares de-listed from stock market in May due to continuous losses.
"The case may once again dash hopes for 'zero default risk' myth on SOE bonds and stir up market chaos," noted Xu, explaining that China National Erzhong Group was a SOE under the State-owned Assets Supervision and Administration Commission of the State Council when issuing debts in 2012 and turned into a wholly-owned subsidiary of another SOE China National Machinery Industry Corporation in July 2013.
Many researchers believe that the case would further aggravate market concerns with debenture risks.
Qu Qing, chief bond analyst with Huachuang Securities, noted that the possible debt default might exert a negative impact on debenture market, especially on low-grade bonds offered by heavy industry enterprises.
Analysts suggested that investors avoid investing in low-grade bonds in the near future as debenture risks were accumulating.
