In January 2021, the amount of Chinese offshore U.S. dollar-denominated debt in default has exceeded one-third of the entire year of 2020. Companies that have recently experienced offshore debt crises include subsidiaries of solar giant GCL-Poly Energy Holdings Ltd. and technology conglomerate Tsinghua Unigrouco.
Bloomberg data showed that the Chinese offshore bond market defaulted on more than $2.7 billion in January this year, or about 33% of the full-year 2020 amount, accounting for 80% of the full-year 2018 and 70% of the full-year 2019 default size, Bloomberg reported on Feb. 4.
Cecilia Chan, a Bloomberg Intelligence analyst, said the Chinese Communist government implemented monetary easing and economic stimulus last year, but the private sector was not able to reap substantial benefits from it. This year, if the Chinese government seeks to tighten monetary policy for fear of rising debt, the situation of bond defaults by Chinese companies may worsen.
Cecilia Chan expects the size of offshore defaults by Chinese companies to rise further this year compared to last year.
Market participants also expect that more Chinese companies may default this year.
Recently China’s head property developer Huaxia Happiness has been in the spotlight. A few days ago, Huaxia Happiness notified investors that it has stopped debt payments since Wednesday (Feb. 3). Bloomberg data shows that Huaxia Happiness has nearly 55.6 billion yuan in domestic stocks and $4.56 billion in bonds outstanding outside of China.
Li Yuzhe, an analyst at China Merchants Securities, said the original financing dependence was broken by the new capital management regulations, and investors’ own preference for credit markets was weaker, “with the central bank’s monetary policy tightening acting as a catalyst, amplifying the negative effects and being the trigger.” He expects that the market may be more cautious in credit bond investments after the liquidity tightening.
China’s weighted average interbank overnight pledged repo rate breached the 3.3% interest rate corridor ceiling standing lending facility (SLF) rate late last month, once touching a new high of more than five-and-a-half years. As funding costs climbed, the market-wide overnight repo daily volume also shrank by nearly 70% at the end of last month from its peak early last month.
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