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Chinese SOE China Erzhong warns of potential default

An investor in front of an electronic board showing stock information at a brokerage house in Shanghai, September 2, 2015.
China Daily | Reuters

China National Erzhong Group, a state-owned manufacturer of heavy machinery, has warned that it may have to stop paying interest on a Rmb 1 billion (US$157 million) medium term note after being sued by a creditor.

A default would be the second by a Chinese state-owned company in the interbank bond market following that of power equipment manufacturer Baoding Tianwei Group in April.

China Erzhong said in a statement that one of its creditors, First Design & Research Institute MI China, had taken it to court to force a debt restructuring on the ground that the company was unable to pay debt and could not be liquidated.

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If the court orders a restructuring, China Erzhong said its 5-year MTN issued in 2012 would mature with immediate effect.

It added that if such a ruling were to take place before September 28th, the interest payment date for the MTN, it would not pay the coupon, in accordance with Chinese bankruptcy law.

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The company said it is trying to raise funds to pay interest and will convene a meeting with bondholders soon.

Meanwhile, China Erzhong Group (Deyang) Heavy Industries, a listed subsidiary of the group, has been sued by another creditor seeking a debt restructuring. The subsidiary issued a Rmb800m 7-year enterprise bond in 2008. Investors sold back part of the bonds in 2013, leaving Rmb310m in principal unpaid.