INSUBCONTINENT EXCLUSIVE:
China is zooming to a record year of corporate-bond defaults, with the 2018 total already more than three-quarters of the previous high even
before an expected economic slowdown bites.
Chinese companies have reneged on about 16.5 billion yuan ($2.5 billion) of public bond payments
so far this year, compared with the high of 20.7 billion yuan seen in all of 2016, according to data compiled by Bloomberg
Strains are set to get worse if the trends of credit-rating companies are anything to go by — agencies including Dagong Global Rating Co
have been downgrading firms by an unprecedented margin.
“Corporate profits have worsened this year and are unlikely to improve against the
backdrop of an economic slowdown,” Li Shi, general manager of the rating and bond-research department at China Chengxin International
“Refinancing will continue to be tough as long as the crackdown on shadow banking continues.”
The domestic corporate-debt market is
almost exclusively a local affair, with foreign investors gravitating toward government-linked securities since China boosted access to its
The worsening in credit quality offers little incentive to dip in now, though in time analysts see a more disciplined credit market offering
diversification opportunities.
In the meantime, rising yields are set to make the refinancing of maturing debt all the tougher for private
companies that lack the access to the statedominated banking system that national behemoths enjoy
With the People’s Bank of China making only limited steps to support credit to private companies, borrowing costs show no sign of
dropping.
Borrowers have missed payments on at least 20 domestic bonds so far this year, according to data compiled by Bloomberg
There was about 66.3 billion yuan of defaulted notes outstanding at the end of May, or 0.39 per cent of corporate bonds outstanding, PBOC
While still small, that share may be poised to rise.
Dagong has reported 13 credit-rating downgrades compared with 10 upgrades so far this
year, the highest such ratio on record, according to Bloomberg-compiled data
Results from Dagong peers such as China Chengxin International Credit Rating Co
and China Lianhe Credit Rating Co
show similar trends.
The silver lining is that the defaults show Chinese regulators are increasingly comfortable with allowing struggling
companies to fend for themselves without official rescues
Bond defaults are good for the longterm development of Chinese markets, Pan Gongsheng, director for State Administration of Foreign
Exchange, said in Hong Kong Tuesday.
“They are necessary for better creditrisk pricing and will create a healthier bond market in the long
term,” Christopher Lee, managing director of corporate ratings at SP Global ratings in Hong Kong said of defaults
“It is unlikely there will be a wave of large-scale defaults or concentration of defaults -- any such developments will be quickly
contained to prevent systemic risks from emerging.”
With rising trade tensions with the US threatening to hurt corporate cash flows, the
temptation to shore up credit provision may rise
Data over the weekend showed that a gauge of export orders tumbled into contraction in June.
