Chinese Investment Trust Defaults on Bond Payment, Stirring Fear
By MARK LANDLER -- October 28, 1998
HONG KONG -- In a move that could intensify fears of
a debt crisis in China, the country's
second-largest investment-trust company has failed to
make a bond payment, a bank official said Tuesday. It
was the first time a Chinese company has defaulted on
an international bond since the Chinese Communist
authorities came to power in 1949.
The company, the Guangdong International Trust and
Investment Corporation, failed to make an interest
payment of $8.75 million on a $200 million bond,
according to an official at the Chase Manhattan
Corporation in New York. Chase acts as a payment agent
for bonds issued by the company, which is known here as
Gitic.
"I can confirm that the payment was not received by
Chase," said the official, who insisted on anonymity.
It was unclear to whom the payment was owed.
The Beijing Government shut down Gitic on Oct. 6, after
it became clear that the company was sinking under
hundreds of millions of dollars in debt. The action was
seen as a sign of Beijing's resolve to crack down on
companies affiliated with local and regional
governments, which have borrowed large amounts from
foreign creditors -- much of that in loans not
authorized by the central Government.
While Beijing had already suspended Gitic's debt
payments in order to determine the magnitude of its
debts, the default on a bond payment could jolt foreign
investors who had regarded China as a safe harbor amid
Asia's turbulence. They also had generally assumed that
the Chinese Government would stand behind the borrowing
of companies with official ties.
"Investors tend to be reactive," said John Pinkel, head
of China research at Merrill Lynch here. "But I think
the Chinese Government warned people about this."
Gitic, which is incorporated in Hong Kong and is the
main fund-raising arm of Guangdong province in the
south, has a portfolio of businesses including trading,
manufacturing, finance and property.
The nation's largest investment company, China
International Trust and Investment, has not encountered
financial difficulty yet, though Tuesday, Moody's
Investors Service placed its debt on review for a
possible downgrading.
Gitic's troubles have already caused anxiety among
foreign investors, who fear there could be large hidden
debts in other Chinese investment companies and in "red
chips," companies that are incorporated and listed in
Hong Kong but controlled by Beijing or by mainland
province governments.
Another Guangdong-based investment company, Guangzhou
International Trust and Investment, is seeking a
capital infusion of $72 million from the Guangzhou city
government in order to stay afloat, according to a
report today in The South China Morning Post.
"I think the Chinese Government didn't do enough to
clarify the liabilities of these companies," Pinkel
said. "But equally, many banks were imprudent in their
lending to offshore entities of Chinese organizations."
He estimated that China's total foreign borrowing -- by
provincial and municipal governments and by their
affiliated companies -- was $30 billion higher than
Beijing's official figure of $130 billion.
Gitic alone may have total debts of more than $2
billion, according to analysts here. But the company's
liquidators have been unable to determine exactly how
much it owes to which foreign creditors -- including
Japanese and European banks -- a situation that has led
to confusion about the depth of the crisis.
And Chinese officials are sending mixed signals about
their willingness to back up loans made to Hong Kong
companies. The Mayor of Shenzhen, an industrial city
across the border from Hong Kong, was quoted in The
South China Morning Post as saying that Beijing would
repay foreign loans to Gitic.
"The action is a closure, which is different from a
bankruptcy," the Mayor, Li Zibin, reportedly said.
"Closure is a Government action, for which the
Government has taken full responsibility."
But in comments published earlier this week, Finance
Minister Xiang Huaicheng warned that Beijing would not
guarantee repayment of loans that were not authorized
by the central Government.
Such ambiguity has left international credit-rating
agencies jittery. Moody's lowered the foreign debt of
Gitic last Friday, saying the move reflected its
concern over increased pressures on the company's
resources in the face of maturing near-term debt
payments.
On Monday, Moody's placed the debt of Cathay
International Ltd., a Hong Kong-based company that
builds power plants and expressways in Guangdong
province, on watch for a possible downgrading, merely
because it has close financial connections to Guangzhou
International Trust and Investment.
The financial problems of Chinese corporations have
commanded the attention of senior leaders. Last week,
Prime Minister Zhu Rongji traveled to Guangdong to meet
with province officials and top executives of red chip
companies to assess the extent of the financial
problems.
Copyright 1998 The New York Times Company
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