Domino Effect? Sudden Default By AAA-Rated Chinese State-Owned Coal Miner Sends Shockwaves Across Markets

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Something unexpected happened in China last week and it triggered a shockwave across Chinese bond markets.

The abrupt 1 billion yuan ($151 million) bond default on Friday of a state-owned coal mining company in Central China’s Henan province, one of China’s most populous provinces with more than 95 million people, set off reverberations across China affecting its parent company, industry peers and other state-owned bond issuers and triggered an investigation by the interbank bond market regulator. The default came just weeks after Brilliance Auto, a carmaker owned by the Liaoning provincial government which owns 25% of a venture with BMW, announced it would default on a 1 billion yuan bond which matured in late October.

As Caixin reports, Yongcheng Coal and Electricity Holding Group, which just last month got the highest possible, AAA rating from a domestic credit rating company, failed to repay an ultra-short-term bond that matured Tuesday, according to a statement posted by the Shanghai Clearing House.

The default of Yongcheng's bond - which now has 24.4 billion yuan worth of bonds outstanding, among which 6 billion yuan will mature by the end of 2020 according to Bloomberg- immediately set off a chain reaction affecting other coal mining companies and local government financing vehicles in other provinces. As shown in the chart below, local government bonds as far away as Yunnan province were affected.