CSRC launches probe of Yongcheng Coal and auditor for possible misconducts in default
By Yang Jing

China's top securities regulator started an investigation into Yongcheng Coal and Electricity Holding Group Co. Ltd. and its auditor for possible violation related to a bond default that roiled the country's debt market.

China Securities Regulatory Commission (CSRC) announced the decision on Friday night, vowing to ensure the sound development of the bond market, the latest step to reassure investors who were upset by the surprise default of the 1 billion yuan ($152 million) bond issued by the state-owned coal miner.

The markets got shocked by the default for many reasons – the bond and the issuer were rated as AAA, the highest possible rating from a domestic credit rater. Investors trusted in the credit of state-owned enterprises (SOEs) and Yongcheng Coal issued new bonds just 20 days before the November 10 default.

The bond creditors on Tuesday agreed a plan for the miner in central China's Henan Province to first repay 50 percent of the principal and to extend the repayment period on the remainder for 270 days, according to a statement released on the website of China's National Interbank Funding Center.

However, the solution was just a start – Yongcheng Coal missed the payment deadline for another two 1-billion-yuan short-term commercial papers that matured on November 22 and 23 respectively.

The default not only caused traded coal bonds to plunge across China, but also gave rise to wide worries that if the state bail out is over – investors usually believe that SOEs have an implicit guarantee from the local governments – and there are rising concerns about transfer of assets before defaults.

Before Yongcheng Coal's default, Huachen Automotive Group, parent company of BMW's Chinese joint venture partner, also defaulted on a 1-billion-yuan bond in October and was ruled by the court on November 20 to undergo bankruptcy restructuring.

Government's support may vary with enterprises' competitiveness, S&P said in a report released in November reviewing the two default cases, noting governments may be less willing to support weaker SOEs which lack core advantages.

The Financial Stability and Development Committee held a meeting on November 22 chaired by vice premier Liu He, warning that China will show "zero tolerance" for wrongdoings on bond financing, including malicious transfer of assets to misuse of funds.

(Cover image: China Securities Regulatory Commission's office building lobby. /CFP)