Banks Left Holding A $3.5 Billion Huachen Can

State-owned Huachen Automotive Group is the latest company in China to default on payments after failure to pay an Rmb1bn bond in October, increasing fears that the bond markets’ turmoil could filter down to the banking sector.

Chinese, foreign banks, and trust companies have an Rmb33.5bn ($5.1bn) Huachen shaped hole in their books, with this latest revelation doing little to ease the already jittery bond markets.

The ever-growing list of defaults comes in stark contrast to the long-held belief that central and local governments in China will always step in to salvage state-owned groups, widening fears about the health of the financial system in general.

Huachen Automotive Group lists BMW’s partner in its joint venture manufacturing plant in China among its subsidiaries is based in Shenyang, controlled by the Liaoning regional government.

Creditors include two of China’s “Big Four” state-owned banks, China Construction Bank and Industrial and Commercial Bank of China.

Huachen Automotive Group’s bank borrowings (Rmb m)

China Everbright Bank – 3,314
Xingye Bank – 2,891
Shengjing Bank – 2,887
Huaxia Bank – 2,054
China Construction Bank – 2,015
Export-Import Bank of China – 1,800
Bank of Fuxin – 1,000
Bank of Jinzhou – 950
Xiamen International Bank – 945
China Minsheng Bank – 850
DBS – 779
Others – 14,026

Total – 33,511

Huachen also owes Rmb2.5bn to two centrally-controlled state policy banks: China Development Bank and Export-Import Bank of China.

The situation at Huachen could have a broader impact on the flow of credit through China’s banks who assign credit quotas for provinces and cities. The industrial sector in Liaoning has long been seen to have the backing of state-owned banks based on the support it enjoyed from the provincial government.

According to a senior banker at one of Huachen’s biggest creditors:

“We worked with Huachen because it is the biggest state-owned enterprise in Liaoning, and the local government can’t afford to let it go under.”

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