BEIJING (Reuters) - Bond defaults by Chinese state-owned firms should be handled through market-based mechanisms and the legal system, the People's Daily said in an editorial on Friday.

The editorial is the latest sign the central government wants to limit the perception that local government will always backstop losses in debt issued by state-owned companies.

An unprecedented number of over 20 bond defaults have been confirmed as many companies, especially in industries with surplus production, feel the pinch of China's weakest economic growth in 25 years.

The government has been working to change the perception that it will backstop any losses, which distorts the market and only exacerbates the problem, as underperforming firms are bailed out.


While bond prices and liquidity have recovered substantially since a series of state-owned defaults and warnings on curbing overcapacity set off a sharp correction in April, the editorial says there are big and growing risks in highly leveraged state-owned enterprises (SOEs).

"Guaranteed repayment of bonds raises risks in SOE bonds and leads to higher leverage ratios and a buildup of risks," the editorial said.

SOE debt is so high because "state firms treated the government as their nanny and backstop, and financial institutions are suffering from a disease of SOE-worship," People's Daily said.

Despite the tough talk, some regulators have called for a softer touch.

The banking regulator requested banks, also government-owned, not to "casually" cut off or cease lending to firms facing business difficulties, according to media reports this week.

China's policymakers have issued a series of tough comments on "zombie" SOEs, many of which are heavily indebted from years of breakneck expansion.

(Reporting by Elias Glenn and Nathaniel Taplin; Editing by Christian Schmollinger)

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