Private companies in Shandong province could face more troubles amid a liquidity crunch more than two years after a major bond default scare rocked the third-largest regional economy in China, analysts say.

The market's appetite for riskier credit is also waning amid an economic slowdown, hurting refinancing outlook, as highlighted by recent debt repayment challenges at two prominent local firms Shandong Ruyi and the Xiwang Group.

Private companies in the eastern province have defaulted on 28 bonds worth 13.6 billion yuan (US$1.9 billion) so far this year, Wind data shows. Only their peers in neighbouring Jiangsu have produced more delinquencies among China's 32 provinces.

The continuing losses show liquidity in Shandong's regional economy has improved little since March 2017, when aluminium processor Qixing Group defaulted on 7 billion yuan of borrowings. The failure also exposed a web of interlocking credit guarantees and infected dozens of local enterprises, leading to a slew of bankruptcies.

Smoke is emitted from chimneys of a cement plant in Binzhou city, in eastern China's Shandong province. Photo: AP alt=Smoke is emitted from chimneys of a cement plant in Binzhou city, in eastern China's Shandong province. Photo: AP

"We foresee no immediate relief to Shandong privately-owned enterprises' liquidity and refinancing challenges given China's slowing economy," analysts led by Li Chang at S&P Global Ratings said in a report published on October 20. Their credit risk remains "significant for the next 12 months."

In addition, Shandong's economy is "skewed toward gritty smoke-stack industries where companies are typically highly leveraged," the S&P analysts wrote.

Last Friday, a local state-owned investment firm bought a 26 per cent stake in Shandong Ruyi Technology for 3.5 billion yuan and provided credit guarantees for the fashion group's bonds. The so-called LVMH of China has 1.9 billion yuan of onshore bonds due on Wednesday.

Moody's Investors Service on October 10 downgraded Shandong Ruyi's corporate family rating by one step to B3 -- or five level below investment grade. It is likely to struggle to repay onshore and offshore bonds totalling 4.6 billion yuan due this year and 2.5 billion yuan of domestic bonds in 2020, Moody's said.

A worker manipulates coils of steel at Xiwang Special Steel in Zouping County in eastern China's Shandong province. Photo: AP alt=A worker manipulates coils of steel at Xiwang Special Steel in Zouping County in eastern China's Shandong province. Photo: AP

Xiwang Group, a major corn and steel processing company, is also coming into focus after unveiling a plan to sell 450 million yuan of notes on Monday. With 3.5 billion yuan of onshore notes maturing this quarter, two local rating companies have placed the group under review for potential downgrade.

The credit environment for private firms in China continues to be stretched after a report showed the economy grew at the slowest pace in nearly three decades, said Ivan Chung, head of Greater China credit research and analysis at Moody's.

China's onshore bond defaults likely to continue rising as ratio matches 2018 record, Fitch says

"Money in the market is flowing into state-owned companies, and many private firms have to issue short-term bonds to support their long-term investments," Chung said. "When the companies encounter refinancing troubles, they run into liquidity problems."

As banks typically prefer to lend to state-owned companies, private firms often have to provide a large amount of collateral or credit guarantee for other companies to secure financing.

The practice of "cross guarantee" among Shandong-based companies is exacerbating the problem, said Meng Xiangjuan, chief fixed-income analyst at Shenwan Hongyuan Securities.

Shandong companies have over the years formed a complex web of chained borrowing, which could "send a company's liquidity issues reverberating through the credit system", the S&P analysts said in their report.

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