Shanxi steps in to avert Huatong bond default

China avoided its second domestic bond default on Wednesday, as a local government stepped in with cash at the last minute.

Huatong Road & Bridge Group Co Ltd, a Shanxi-based private construction company, came up with the money to repay 400 million yuan in principal ($65 million) and 29.2 million yuan in interest on bonds it issued last year.

On July 16, the company said in a statement that it was unsure whether it could make the payment, after its chairman had been taken away by the police.

Reuters reported on Wednesday that the Shanxi government came up with part of the money and the company covered the rest. The report didn not give exact figures.

The 21st Century Business Herald quoted an anonymous source within the company as saying that governments on different levels in Shanxi province owed the company 595 million yuan in total.

"A default would make it hard for other companies in the province to get financing, so the provincial government coordinated the repayment," the source was quoted as saying.

The report said that the Shanxi provincial government is set to hold an investment promotion campaign in Beijing with central bankers and top lenders to attract financing to support local economic development.

The first bond default was in March, when Shanghai Chaori Solar Energy Science & Technology Co missed a coupon payment on its domestic bonds. Rates in the bond market went through a correction following the default to price in higher risks, and at least 20 companies abandoned plans for new bond issues.

A default by Huatong threatened to shake the market harder, because it could have been the first case involving failure to pay both interest and principal, and it would also have been the first default in the interbank note market, the nation's biggest bond market.

Huatong is operating at a profit at the moment. Public statements show that the company made a profit of 300 million yuan in 2013 and 65 million yuan in the first quarter of this year.

The company is also believed to have ample liquidity, with 1.9 billion yuan of its 10.7 billion yuan total assets being in cash at the end of March.

But the company needs Chairman Wang Guorui, who holds a 60 percent stake in the company, to "coordinate" internal fund movements, the 21st Century Business Herald said.

A statement from the Shanxi Committee of the Chinese People's Political Consultative Conference said Wang had been removed from his position on suspicions he violated the law.