Less than a decade ago, Yongcheng Coal and Electricity Holding was one of China’s most celebrated energy companies. Blessed with ample reserves of high-grade coal at its mines in China’s central Henan province, the nation’s government-controlled banks were eager to hand the firm cheap credit. At its height in 2013, the business’s annual revenue was Rmb127-4bn ($19-5bn).
“We were the most profitable coal mine with the highest salaries in the nation,” said one senior Yongcheng executive, who asked not to be identified, of that period. A dramatic decline has changed all that. The city of Yongcheng, where the group is based, is today pockmarked with half-built and dilapidated buildings. Struggling workers at the company, many of whom have not been paid for months, have taken to packing and selling flour to make ends meet.
But Yongcheng’s woes did not take on national significance until last month, when the company defaulted on bonds worth Rmb3bn. That development disturbed China’s $15tn public debt market, the world’s second-biggest, and kicked off a spate of defaults at other local governmentcontrolled businesses, which account for a big chunk of the country’s economy.
The defaults have ricocheted through China’s financial system. Analysts say that state-linked companies now face difficulties raising capital as a result. The episode has also obliterated longstanding investor assumptions that authorities will always bail out state-owned enterprises in China. “The biggest impact has been on other issue any bonds in the last few weeks. The longer that their companies are not able to issue bonds, the bigger the problem will grow.”
Some think that Yongcheng’s difficulties could be a harbinger for problems at other state-linked groups across China. “Yongcheng’s business failure could happen to any state-owned enterprise with weak fundamentals,” added a Beijing-based investor that bought the company’s bonds. “A lot more defaults could be in the pipeline.”
In the case of Yongcheng, the group’s downfall was sown by the financial unravelling of its parent company, Henan Energy and Chemical Group. HECG forced the coal miner to issue increasingly pricier bonds and borrow from China’s less regulated shadow bank sector at a time when the overall credit environment was tightening.
That transformed Yongcheng from what its bankers regarded as a low-risk borrower into a much riskier proposition with a myriad of creditors.
The woes for Yongcheng and its parent can be traced back to more than a decade ago when the latter launched an ill-fated expansion into coal-derived chemicals.