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China's eight largest bank defaults on ‘dim sum’ bond

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(Credit: FRED DUFOUR/AFP/Getty Images ) This photo illustration shows Chinese 100-yuan notes (15.5 USD) in Beijing on August 25, 2015. China's central bank on August 25 cut its benchmark interest rates and the amount of cash banks must keep on hand, the latest stimulus aimed at boosting the world's second-largest economy as it battles a collapse in share prices. CHINA-ECONOMY
April 1
9:47 PM 2016

A Hong Kong unit of Guosen Securities have defaulted on a reminbi-bond trading. This would mark the first debt breach by the state-owned enterprise in offshore market. Nevertheless, analysts doubted the default because the brokerage financial condition is healthy with a strong cast balance.

Dim sum bond are bonds issued outside China that are renminbi-denominated rather than the currency of the country where the bonds are issued. The bonds gained popularity since 2010 when the Chinese government started to encourage renminbi to be used as international currency. Since then, renminbi stockpiles began to develop in Hong Kong and other offshore hubs, whilst dim sum bond usually come with lower interest rate than the bonds issued in mainland.

CNBC reported that according to Financial Times, a Hong Kong unit of Guosen Securities has defaulted in dim sum bond. The default is indicated on the Rmb38 million ($5.9 milllion) bond due April 24 which was sold in 2014. CBNC said missing the payment will set a precedent to other China's state-owned enterprise which operates offshore unit, as creditors widely assume the onshore parent company will always stand behind its affiliates.

Such default was unexpected as Guosen in the mainland is in good financial condition. The brokerage was listed in the 12th position for onshore equity underwriting in 2015 according to Dealogic. Guosen Securities which majority shares is owned by Shenzen government earned a net profit of Rmb14.2 billion ($2.2 billion) in 2015, a 188% increase from previous year.

Guosen Securities was ranked eighth in the entire China's brokerage by assets in 2014.

However many analysts doubted the news of default. A portfolio manager at Sinopac Securities Investment Trust Co. in Taipei, Beck Lee, told Bloomberg, "Guosen is one of the bigger onshore securities houses in China with a strong cash balance and they are highly unlikely to default."

Another analyst from Bank of China Hong Kong Ltd., Ross Lee, said in Tuesday's March 29 report, "Given the strategic importance of the guarantor to the parent, we believe Guosen Securities (onshore) will try its best to ensure the guarantor's (offshore) liquidity to service its outstanding bond and compliance to the bond's terms and conditions."

Analysts which contacted by Reuters also see the default indication as merely a technical breach. A fund manager at Manulife Asset Management, Penny Chen, said "Guosen is one of the bigger onshore securities houses in China with a strong cash balance and they are highly unlikely to default given it is just a technical breach."

Analysts agreed the default indication was a misinterpreted technical breach. Most analysts disagreed because the Guosen Securities is in a very healthy financial condition.

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