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China firm warns of interbank bond default

Photographer | CNBC

Chinese construction firm Huatong Road & Bridge Group said on Wednesday it might fail to pay investors both interest and principal due on a one-year short-term bill issue that matures on July 23.

In a statement published on the website of the official Shanghai Clearing House after the marked closed, unlisted Huatong warned that payments of both interest and principal on the issue are uncertain because its chairman is currently "assisting an official investigation."

If Huatong fails to pay, it would be the first such publicly announced default in China's interbank market, the country's largest bond market. It would also be the first time a Chinese company has publicly defaulted on both interest and principal due on a bond.

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China's first publicly-known default was in March when Shanghai Chaori Solar Energy Science and Technology did not make 89 million yuan ($14.35 million) in interest payments due on a bond traded on the Shenzhen exchange, a far smaller venue serving retail investors.

But that default startled many would-be bond issuers and caused them to put plans on hold as yields on riskier issuances rose in reaction. At the same time, bond investors began moving funds into bonds perceived as protected by implicit government guarantees.

Chinese companies owe their current bondholders just over $1 trillion, of which 15.8 percent is coming due this year, Thomson Reuters data showed.

Huatong, based in the north central province of Shanxi, issued 400 million yuan ($64.48 million) in one-year short-term bills in July last year. According to Reuters data, the company had total assets of 11.1 billion yuan at the end of 2013.

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The company's business is focused in the construction and real estate industries, both of which have suffered as housing prices have declined in China and infrastructure spending has slowed.

The bond has a coupon rate of 7.3 percent. The issue was led by China Guangfa Bank and Guotai Junan Securities.

After Huatong's statement, China Lianhe Credit Rating announced it has downgraded the company's credit rating to BB+ from AA- with negative bias, and the bond's rating to B from A-1, in reaction to the information.

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Credit metrics for many Chinese firms have been steadily worsening, in particular those exposed to real estate. While China posted post 7.5 percent GDP growth in the second quarter, many economists attributed that primarily to government support as opposed to a genuine revival in end demand.