Chinese companies are likely to see a new wave of debt defaults this year after a string of debt meltdowns in 2020.
The Wall Street Journal reported Feb. 17 that about 2.5 percent of China’s offshore high-yield corporate bonds are likely to default this year at face value, according to forecasts by credit bond analysts led by SooChong Lim at JPMorgan Chase & Co.
A record number of 12 Chinese companies defaulted overseas last year, according to Fitch Ratings. That led to more than $7 billion in bonds being affected, also a record. Late last year, a series of unexpected defaults by companies such as Tsinghua Unigroup made investors nervous.
This year, financial stress has hit companies in several industries hard, the report said. Chinese real estate developer Huaxia Happiness (China Fortune Land Development Co., Ltd.) failed to repay some of its domestic loans after its U.S. dollar bonds traded at extremely low levels, while GCL New Energy Holdings Co. defaulted on a $500 million bond.
Meanwhile, creditors have called for a restructuring of HNA Group, which could affect the troubled conglomerate’s ability to repay $200 million in bonds due this year.
Data from the Washington, D.C.-based International Finance Federation (IFF) show that Chinese corporate debt accounts for more than 160 percent of gross domestic product (GDP).
Emre Tiftik, head of sustainability research at the IFF, said the number of corporate bond defaults in China has increased significantly since 2015-2016.
According to the Financial Times, Chinese corporate bonds are up to $4 trillion, with a record default of $30 billion in 2020. Against the backdrop of more than 7 trillion yuan ($1.1 trillion) of onshore bonds maturing, the default figure could be even higher this year, with $2.7 billion of defaults recorded in January alone.
Analysts say signs of risk could grow exponentially as China tightens bank supervision and gradually reduces liquidity support, as the balance sheets of private companies and households have been hit by the Epidemic.
China’s resident leverage ratio rose by more than 31 percentage points between late 2011 and the first half of 2020, the Communist Party’s central bank said in its fourth-quarter 2020 Monetary Policy Implementation Report released late Feb. 8, adding that “the room for continued debt expansion has become very limited and the associated risks are a cause for concern.”
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