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ECONOMY
THIS WEEK> THIS WEEK NO. 31, 2014> ECONOMY
UPDATED: July 28, 2014 NO. 31 JULY 31, 2014
Local Bailout
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The possible second bond default in China was avoided after the local government of north China's Shanxi Province decided to help the troubled Huatong Group.

On July 16, the private construction company claimed that it faced "uncertainties" in paying back the principal and interest of its 400-million-yuan ($64-million) note.

The one-year note, recently revised down by domestic rating agencies to B from A-1, was due on July 23 with an annual interest rate of 7.3 percent.

However, sources close to the bond's underwriters said enough funds were available to cover the principal and interest of the one-year commercial paper, totaling 429.2 million yuan ($69 million).

Governments at different levels in Shanxi have lent 595 million yuan ($96 million) to the company, according to The 21st Century Business Herald, a business newspaper published in Guangzhou, Guangdong Province.

The possibility of a default emerged after the company's Board Chairman, Wang Guorui, was put under investigation for allegedly breaking the law in mid-July.

In early March, Shanghai Chaori Solar Energy Science & Technology failed to cover 89.8 million yuan ($15 million) in interest payments, making it the first onshore bond default and causing a minor panic among investors.

Authorities have signaled since late last year that they would tolerate defaults as long as such incidents do not bring systemic risks to the country's financial systems.

Companies have long relied on local governments and state-backed lenders for last-minute bailouts to help meet their obligations when they run into liquidity problems.

Such bailouts have been criticized for causing distortions in the market and preventing investors from getting a clear look at the risks they are exposed to.



 
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