China Heavy Machine Maker Default Looms as Growth Slows

SHANGHAI — A unit of China’s biggest state-owned machinery company announced it might be unable to make interest payments on a bond, as slowing growth heightens default risks among heavily-indebted firms.

China National Erzhong Group (CNEG), which makes metal smelting equipment, might miss the payment on a 1.0 billion yuan ($156.97 million) five-year bond issued in 2012, it said late Tuesday, without giving an amount.

Chinese authorities say they are trying to reform the lumbering, inefficient industrial giants of the state sector, but the process is slow and obstructed by vested interests.

CNEG is a subsidiary of China National Machinery Industry Corporation, China’s biggest state-owned machinery company and one of around 110 major state-owned firms under the direct central government management.

Investors have asked a court in the southwestern province of Sichuan, where CNEG is based, to restructure the firm as it “clearly lacks the ability to pay,” the statement said, adding the interest payment was due September 26.

China has already seen bond defaults this year as slowing growth in the world’s second-largest economy pressures companies.

The country revised downward its 2014 economic growth figure earlier this month to 7.3%, the weakest in 24 years, while growth in both the first two quarters slowed further to 7.0%.

In April, power equipment maker Baoding Tianwei Group Co. said it had failed to make a coupon payment of 85.5 million yuan ($13.42 million), said to be the first bond default by a state-owned firm.

Also in April, privately-owned technology firm Cloud Live Tech Group said it was unable to pay both principal and interest on a five-year, 480 million yuan ($75.34 million) bond issue sold in 2012.

And in May, the Shanghai stock exchange delisted CNEG’s traded subsidiary, China Erzhong Group (Deyang) Heavy Industries Co., due to poor performance.

“Due to the influence of the macro-economic environment, the company’s main product faced continuous sluggish demand and the industry faces severe production overcapacity,” the listed arm said in its 2014 earnings report.