So far this year, Chinese companies have defaulted on a total of about $10 billion in domestic and foreign bonds, with real estate companies, local state-owned enterprises and urban investment companies likely to be the high areas of future debt defaults.
Bloomberg reported on March 19 that Bloomberg aggregated data showing that Chinese companies have defaulted on about $10 billion in domestic and foreign bonds so far this year, a record high for the same period, with real estate bonds accounting for 20% of the total. The outlook for refinancing by small- and medium-sized real estate companies, state-owned enterprises in weakly qualified and financially weak regions, and low-grade urban investment projects is also not good given the trend of tightening Chinese government policies that is difficult to reverse in the near term.
Carol Liao, a China economist at Pacific Investment Management, said that as government policies tighten, some companies will have trouble refinancing their debt, making it more difficult to repay in installments, and more defaults are likely in the coming quarters.
Carol Liao believes industries with excess capacity, signs of overheating or not being environmentally friendly will face greater risks, including coal companies, and highly leveraged housing companies with more land acquisitions in second- and third-tier cities.
The market turmoil triggered by the unexpected default of Yong Coal last November has calmed down, with credit spreads on 5-year AAA-rated corporate bonds and Treasuries having fallen to their lowest in 2016 earlier this month. However, the domestic credit bond market will see unprecedented maturity pressure in March-April, and market participants still suggest that they need to be wary of over-expected default mines.
China’s “three red lines” and real estate loan concentration management system to curb the property bubble last year have limited the ability of real estate companies to raise capital. After companies such as Huaxia Happiness and Chongqing Xiexin Yuanchuang Industrial defaulted on their bonds, new bond sales for real estate companies have been sluggish, with net financing in the domestic bond market for listed real estate companies having been negative for nine straight months, the longest since at least early 2015, according to data aggregated by Bloomberg.
In addition to real estate companies, Yong Coal default triggered a financing winter in the coal industry, coupled with the recent bank note default of Chongqing Energy Investment Group and the risk event of Jizhong Energy Group, investors are unprecedentedly wary of the profitability and solvency of weak state-owned enterprises, the refinancing difficulties of coal companies in the primary market continue unabated, and discounted selling in the secondary market seems to have become the norm. Coal remains one of the most worried sectors in the market, and the financing of commodity issuers led by local SOEs is hardly optimistic.
The outlook for S&P’s portfolio of rated SOEs is negative due to the unsustainable capital structure of some companies, the potential deterioration of local government finances, and the fact that government support has become more selective, said Li Chang, director of corporate ratings for S&P Global Ratings Greater China. S&P previously noted in a report that recent defaults have caused local SOEs to face rising refinancing costs for $25 billion of bonds due this year, with the cost of issuing debt for such entities rising by 100-300 basis points.
According to data aggregated by Bloomberg, many regions have experienced shortfalls in net bond financing so far this year. The ratio of issuance to maturity in the domestic credit bond market last month, for example, fell to 25% for issuers in Shanxi province, a major coal province, compared with 184% in December last year, while the net financing ratio for issuers in Hebei province fell to 18% from 124% in December last year.
For municipal investment companies (local government financing platform, LGFV), this year will be a year of high-pressure regulation of hidden debt in China, and investors in low-grade municipal investment bonds are afraid of a difficult Time.
Some LGFVs’ dollar-denominated bonds were once lower after news of Chongqing Energy Investment Group’s bank note default, and March-April maturities of domestic municipal bonds were the highest on record, according to data compiled by Bloomberg.
Wu Ziyu of Aberdeen Standard points out that even local governments with stronger financial resources have limited budgets and cannot bail out all local SOEs, and the government’s tolerance for defaults has increased, “We think credit risk has really elevated.”
Analysts point out that the credit risk of financing platforms in Hunan and Yunnan is rising, and the credit disparity of local governments will intensify, as local hidden debts have been elevated to a “national security issue” at the just-concluded “two sessions” of the Chinese Communist Party.
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