A Chinese government-owned company just defaulted on its debt. It's a worrying sign for the country's economy

panda bear weightliftingYingying, a 17-year-old panda, born in a zoo in the southwestern province of Sichuan, lifts weights during a performance at the Chinese Acrobats Arts Festival in Beijing late October 20, 2001.REUTERS/Guang Niu

  • Qinghai Provincial Investment Group failed to pay an $11 million interest payment on a offshore $300 million bond on Friday, the first time a state-owned Chinese company has done so for 20 years.
  • It's another sign of the increasing strain on debt-loaded provincial governments in China.
  • Despite attempts to loosen lending conditions in recent months, China's slowing economy is negatively impacting default rates - now worryingly extending to state-owned companies.

China's slowing economy has led to companies in the country defaulting on their debt. But state-owned companies, with their sturdy shield of government ownership, haven't followed suit.

That was until Friday, when, for the first time in two decades, a China-owned company failed to make a payment on its debt burden.

Qinghai Provincial Investment Group (QPIG), which was downgraded by S&P Global Ratings to junk status, failed to pay an $11 million interest payment on a offshore $300 million bond last week.

QIPG then missed a separate principal and interest payment on a 20 million yuan ($3 million) onshore renminbi bond that matured on Monday, according to Caixin. Qinghai Provincial is the largest aluminum producer in Qinghai and majority-owned by the provincial government, according to S&P.

S&P suggested that they wouldn't count the bond in default, given the expectation that the provincial government would continue its extraordinary aid to the company. However, the rating agency poured cold water on the manufacturer's future prospects, citing the risk that the state aid "will weaken over time."

It's a worrying sign amid China's slowing economy and mounting debt.

Local media previously reported that help from the Qinghai government enabled Qinghai Provincial to narrowly avoid two defaults on maturing bonds last year, according to the Financial Times. Chinese local governments are increasingly under strain after Beijing imposed tight credit controls in recent years.

A slowing economy has meant that this policy is being reversed with lending encouraged, notably through loosened reserve ration requirements by China's central bank.

Read more: China spent years trying to trim its massive debt burden. A recent move to pile on more could be risky

There's been a spate of defaults for Chinese companies in recent years with state-owned companies also defaulting on domestic renminbi loans and bonds. The last state-owned company to default on an offshore dollar bond was Guangdong International Trust and Investment Company, which collapsed in 1998 after it was caught out by rising US interest rates.

Chinese companies are able to pay improved currency conversion rates by issuing debt "offshore" in Hong Kong than by borrowing dollars from Chinese lenders. QIPG's default will be a worry for investors already concerned about the Chinese market and the high levels of debt within it.

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