An arm of one of China’s largest investment banks, Guosen Securities, has denied that it will default on a bond traded in Hong Kong, after an earlier report said it would miss coupon payments on a so-called dim-sum bond in April.
Bloomberg reports that Guosen’s Hong Kong arm has denied it will default and said a guarantee on the bond, also known as a keepwell, “continues to be in full force and effect.”
The alleged default was first reported by the Financial Times, which, citing a document, said Guosen’s Hong Kong arm had defaulted on a dim-sum bond and would miss a coupon payment worth 38 million renminbi (£4.1 million, $5.9 million) on April 24.
The default would be the first by a state-owned enterprise in the Chinese offshore market in nearly 20 years.
At their most basic level, dim-sum bonds are bonds issued outside China but denominated in Chinese renminbi, rather than the currency of the country where they’re issued. The bonds first became popular in 2010, when the Chinese government wanted to encourage the renminbi to be used as an international currency.
That encouragement led renminbi stockpiles to develop in Hong Kong and other offshore hubs, which in turn meant that dim-sum bonds generally come with lower interest rates than debt issued onshore in China.
According to analysts the FT spoke with, any default could set a big precedent for the offshore units of Chinese companies in terms of defaults. It is argued that offshore units of state-owned Chinese companies have assumed that their parent companies will stop any default, however if any bank were to default, that would likely put paid to the belief.
While defaults in China’s capital markets aren’t hugely unusual, the big shock when it comes to any potential default from Guosen is that, as a whole, the bank seems to be in a pretty sure state financially. In January it reported net profits of 14.2 billion renminbi (£1.5 billion, $2.2 billion), a 188% increase from the previous year. Guosen was also the eighth-biggest brokerage in terms of total assets at the end of 2014, when the most recent figures were released.
Investors in Guosen, which trades its shares in the city of Shenzhen, didn’t seem to be too worried by news of the reported default, with shares closing 0.49% higher on Thursday.