A government-linked holding company in the northwestern Chinese province of Xinjiang has become the first such organization to fail to repay a public debt after announcing it would default on a RMB 500 million ($73 million) bond on Tuesday.
The default by Sixth Agricultural State-Owned Assets Management Co. could mark the onset of further bad loans held by governmental bodies, as Beijing takes a harder stance on the debt-swollen state sector. Sixth Agricultural has another similar loan due to mature on Sunday, which it told investors it could also default on.
Though this kind of debt represents only a small fraction of China’s bond market, an increase in defaults by government-linked entities may worry investors as until now Beijing has given the impression that it would always be on hand to bail out troubled organizations.
According to the Financial Times, local government debt rose from 27% of GDP in 2013 to 45% in 2017, with many authorities using investment vehicles set up by the central government to gather more funds.
Sixth Agricultural’s credit rating was dropped from AA – already considered junk on China’s onshore market – to C on Tuesday.