The pace of credit bond defaults in China has accelerated this year.
China’s domestic credit bond defaults are surging toward the 100 billion yuan mark at a record pace as the Communist Party of China (CPC) authorities, facing pressure from a downward economic spiral and declining fiscal revenues, are no longer able to bail out corporate debt defaults.
Bloomberg reported on May 11 that, according to data compiled by Bloomberg, China’s onshore credit debt defaults so far this year have involved a combined principal amount of about RMB 99.8 billion, including 58 cases of public issues and 15 cases of private placements.
Bloomberg reports that the size of China’s credit bond defaults this year is poised to exceed 100 billion yuan for the fourth consecutive year, while this year’s stepping on the line is earlier than in the past, with the size of defaults in 2019 breaking through 100 billion in September.
Li Yuzhe, credit analyst at China Merchants Securities, said that “the volume of domestic credit bond defaults will hit a record high this year” as the government reduces bailouts for enterprises and the default rate of state-owned enterprises increases.
The BBC Chinese website reported that Chinese state-owned enterprises’ debt is considered to be “backed” by the government and thus enjoys a high credit rating. But with the Communist government under double pressure from the economic downturn and declining fiscal revenues, the notion of “rigid payment” on SOE debt has collapsed.
Jean-Charles Sambor, head of emerging market bonds at Faba Asset Management, believes that CCP policymakers now prefer more credit risk exposure in the system, allowing investors to focus more on the credit risk itself rather than speculating on the possibility of government support.
Real estate developers have been among the hardest hit by defaults after the Communist government issued “three red lines” last year to tightly control debt risk for real estate companies: Huaxia Happiness and Tianjin Real Estate Group both defaulted on more than RMB10 billion in the first quarter. Among other industries, Hainan Airlines Holdings and Ziguang Group both defaulted on more than 10 billion yuan.
Some companies have not defaulted on their bonds, but risk events continue to occur. Jizhong Energy Group delayed debt repayment, Chongqing Energy Bank defaulted on its notes, and the lack of local government support for local SOEs worried the market. In addition, the delay in the release of the annual report, downgraded by a number of rating agencies, China Huarong’s financial situation is not in danger also touched the nerves of investors.
According to Li Yuzhe of China Merchants Securities, it is not easy to raise funds for steel and coal companies after the Yong Coal incident, and the pressure of debt maturity is relatively more severe for companies with smaller assets.
Bloomberg data also shows that so far in 2021, Chinese offshore foreign currency debt defaults totaled $3.7 billion, close to fifty percent of last year’s record peak of $8.3 billion, but this year’s offshore defaults occurred in the January-February period.
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