Third bond default by Chinese electronics firm within a month points to wider corporate governance issues

Yujing Liu

Tunghsu Optoelectronic Technology has failed to make good on a bond – its third in less than a month – as the struggles point to poor corporate governance among Chinese companies.

The maker of electronic display panels, which reported ample cash holdings of more than 18 billion yuan as of September, missed an interest payment on its 1.7 billion yuan (US$241 million) onshore bond due on Monday, according to an exchange filing.

The latest default has cast doubt on whether Tunghsu could meet its obligations on a US$44 million bond maturing in June 2020, after it defaulted two notes totalling 3 billion yuan on November 18.

Tunghsu could not be reached immediately for comment.

Chinese corporate bond defaults to rise in 2020, as regulators’ tolerance grows, Moody’s says

Tunghsu is the latest in a growing list of Chinese defaulters this year, as banks have tightened their funding to private companies amid China’s slowest economic growth rate in nearly three decades.

As of November 12, 45 Chinese corporate issuers had defaulted on interest or principal payments on bonds totalling 85.16 billion yuan, compared with 39 defaults on bonds worth 102.48 billion yuan for all of 2018, according to Reuters.

Falling export orders as a result of the US-China trade war has strained the cash flow of manufacturers, while Beijing’s crackdown on shadow banking has also cut off alternative sources of capital for many small companies.

The market is still getting its head around the debt crisis faced by cash-rich Tunghsu. Some have questioned the accuracy and authenticity of its disclosed financials, while others have cautioned against a potential rise in similar surprise defaults in the future. “We have noticed quite a few cases recently where companies kept borrowing from the market despite high cash balances and rising costs,” said Ivan Chung, head of Greater China credit research and analysis at Moody’s Investors Service.

The default by Kangde Xin Composite Material Group in January turned out to be a corporate fraud, exposing corporate governance issues in emerging markets as the credit market becomes tighter and more differentiated, according to Chung.

“When the market was good a few years ago, everybody could easily borrow from the market,” said Chung. “Many private enterprises … could hide internal problems such as cash being used by the parent company instead of the operating company, or issues regarding disclosure of cash position.”

Tungshu is holding a creditors’ meeting on December 9, in an attempt to solve the liquidity crisis. It is also in early talks with the state-owned asset manager of Shijiangzhuang city in northern China for a potential 51.5 per cent stake transfer, according to separate filings.

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