This undated photo captures workers carrying out tasks relating to construction of a refinery project at a petrochemical industry base in Lianyungang, Jiangsu province. (WANG JIANMIN / FOR CHINA DAILY)

State-owned enterprises with weaker credit, high commercialization and from regions with a weaker financial strength could face a higher risk of default in the second half of the year, according to Fitch Ratings. 

Although Chinese SOEs generally showed a strong performance in net bond issuance in the first six months of 2021, the situation varied from region to region, Zhang Shuncheng, Fitch Rating’s associate director of corporates, said.

Credit divergence between different regions is expected to continue in the second half of the year and State-owned enterprises from regions with weaker financial strength could still face higher financing costs, said Zhang Shuncheng, Fitch Rating’s associate director of corporates

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Some regions on the Chinese mainland saw a contraction in net bond issuance, as the default of Yongcheng Coal and Electricity Holding Group in November reduced investors’ expectations of national support for SOEs with a weaker strength, Zhang said. In provinces like Henan, Shanxi and Liaoning, credit spreads on the secondary market saw a remarkable increase, he said.

However, the situation stabilized and eased in the past two months after local governments took measures to restore investor sentiment, Zhang added. 

Zhang said credit divergence between different regions is expected to continue in the second half of the year and that SOEs from regions with weaker financial strength could still face higher financing costs. He pointed out that most defaults were due to problems from the enterprises themselves like overinvestment, weak management and poor debt structure. 

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According to Fitch Ratings’ data, 10 SOEs on the onshore market defaulted in the first half, with a total value of 35.6 billion yuan (US$5.5 billion), and 16 private enterprises defaulted, involving 26.9 billion yuan. On the offshore market, meanwhile, one SOE and four private enterprises defaulted over the same period, involving US$2 billion and US$1.37 billion, respectively.

While the default rate of SOEs is not high, it could be underestimated, Zhang said.

suzihan@chinadailyhk.com