Parent of BMW’s Chinese partner defaults on a bond, as declining car sales pile on to the debt woes of China’s corporate borrowers

Daniel Ren
·3-min read

Huachen Automotive Group Holding, the state-owned parent of BMW‘s main Chinese joint-venture partner, has defaulted on a bond payment, heightening fears about the debt-ridden carmaker’s fate.

The company was not able to repay a 1 billion yuan (US$149.1 million) corporate bond paying 5.3 per cent in annual coupon, which it sold via a private placement three years ago. The group is “working hard to raise money and discussing with investors to iron out the issue,” according to a Shanghai Stock Exchange filing.

Huachen is the parent of Hong Kong-listed Brilliance China Automotive Holdings, which owns 25 per cent of a venture with BMW, making Series 1, 3 and 5 passenger sedans in the Liaoning provincial capital of Shenyang in north-eastern China.

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Its default is the latest in a long list of missed payments by China’s private sector and state-owned borrowers, as the slowest economic growth pace in decades cause earnings to dwindle and make it harder to meet payment schedules in the US$15 trillion onshore bond market.

“Default by a state-owned carmaker could affect bond market sentiment,” said Gu Weiyong, the chief investment officer at Shanghai-based asset manager Ucon Investment. “The grim reality is that many Chinese companies have yet to entirely emerge out of the Covid-19 pandemic.”

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China’s automotive industry, which surpassed the United States in 2009 as the world’s largest automotive market, has been saddled with almost two years of declining sales, as the slowest economic growth pace in decades deterred households form big ticket purchases. Sales began to recover in the second half, but not enough to avert 2020 being the third consecutive year of declining sales.

When the coronavirus pandemic was first reported in China during the first quarter, production was severely curtailed, as assemblies and parts makers were shut throughout the country, with their impact reverberating far and wide across the global industry.

New cars in a parking lot of the Brilliance factory in the Liaoning provincial capital of Shenyang in north-eastern China on July 17, 2017. Photo: AFP
New cars in a parking lot of the Brilliance factory in the Liaoning provincial capital of Shenyang in north-eastern China on July 17, 2017. Photo: AFP

Founded in 2003, BMW-Brilliance was a 50-50 venture between the two companies until BMW paid 3.6 billion (US$4.26 billion) two years ago to buy a 25 per cent share from its Chinese partner while boosting its holding to 75 per cent. Huachen had 17.2 billion yuan in outstanding bonds as of October 23.

Brilliance China’s first-half net profit rose 25.2 per cent from last year to 4.05 billion yuan. Factoring out the net income contributed by BMW brand, the Hong Kong-listed company posted a first-half loss of 340 million yuan.

The Liaoning provincial government is considering taking Brilliance China private, according to local media reports. The company’s shares fell 4.8 per cent to HK$6.78 (87 US cents) in Hong Kong trading on Tuesday.

Local authorities and China’s financial regulators are particularly wary of defaults or any financial misadventure that could potentially set off civic unrest, in a nation faced with a dearth of investible options.

They tend to step in to inject much-needed cash, or extend payment holidays, to help defaulting borrowers survive. It was not until March 2014 that the market saw its first default, when Shanghai Chaori Solar Energy Science & Technology failed to make an interest payment.

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