Defaults in China's corporate sector have spiked.
Bond investors have reason to be concerned about their China holdings. Defaults on Chinese corporate bonds rose to a record high in 2018. In the first 10 months of the year, 34 Chinese companies defaulted on domestic bonds totaling 84 billion renminbi in value (US$12 billion), according to Fitch Ratings and Wind Info. Defaulted corporate bonds totaled around RMB26 billion in 2017 and RMB38 billion in 2016, the previous record-high year.
The spike in defaults has dampened demand for bond sales and pushed up margins. Higher margins have translated into higher refinancing expenses as older bonds reach maturity. At the same time, regulators have been tightening control over the shadow banking sector, further limiting fundraising options.
Defaults on offshore, dollar-denominated Chinese bonds surpassed $2 billion in the first 10 months of 2018. No such defaults took place in 2017. In the near term, offshore bonds are likely to remain a concern; Nomura estimates that issues averaging $33.3 billion in value will mature each quarter through the end of 2020. Issuers of these bonds will face additional risks stemming from the depreciation of the Chinese yuan, which has fallen more than 8% against the US dollar since April.
Beijing is taking steps to ease the situation, says Ivan Chung, head of Greater China Credit Research and Analysis at Moody’s. “The central bank has injected liquidity,” he notes, “and regulators have launched policies that encourage companies to roll over debt for those fundamentally sound enterprises that have encountered liquidity problems. However, we don’t think this will fully eliminate defaults.”
Still, their impact will likely be limited, says Chung: “Currently, the scale of defaults is small relative to the whole market. As long as these are isolated cases which do not have much contagion risk, it will not create significant risk to the bond market and economy.”