Jun 15, 2018 04:47 AM

China Bond Market Sentiment Hurt by Rising Defaults

The wave of defaults has reduced investors’ risk appetite for Chinese corporate bonds. Photo: VCG
The wave of defaults has reduced investors’ risk appetite for Chinese corporate bonds. Photo: VCG

The rising tide of defaults on Chinese corporate bonds has made investors wary of new issues, making it even harder for indebted businesses to obtain fresh funds.

The new wave of defaults has triggered worries that a credit crisis may resurface as in 2016 when China embarked on supply-side reform to reduce industrial overcapacity.

A total of 13 issuers have defaulted on a combined 14.8 billion yuan ($2.3 billion) of corporate bonds in China’s domestic market in the first five months this year, compared with 12 issuers and 16.3 billion yuan worth of defaulted bonds in the whole of 2017, according to a report by China Central Depository & Clearing Co.

From January to May, China’s corporate bond market has seen 43 credit rating downgrades for issuers and 80 downgrades for specific bonds, compared with 95 bond downgrades for all of last year.

With about 8.2 trillion yuan of domestic corporate and local-government securities due to mature in the coming 12 months, firms from JPMorgan Chase & Co. to Fidelity International are warning of more defaults to come, according to Bloomberg.

The default surge has coincided with Chinese policymakers’ deleveraging campaign to clamp down off-balance sheet shadow lending.

China’s total social financing growth dropped in May to the lowest in 22 months, mainly hurt by a contraction in trust loans, entrusted loans and undiscounted bankers’ acceptances, which are common forms of off-balance-sheet shadow loans, data from the central bank showed on Tuesday.

The wave of defaults has reduced investors’ risk appetite for Chinese corporate bonds, which in turn contributed to a sharp drop in corporate bond financing in May.

Corporate bond financing decreased by 43.4 billion yuan in May, the first drop in 10 months, compared with an increase of 377.6 billion yuan in April, the central bank said.

In the first quarter, 9.2% of planned bond issues were canceled, and the cancellation rate for issuers with ratings blow AA was as high as 16%.

Private companies, which have long had limited access to traditional bank loans, were hit particularly hard by the deleveraging campaign.

Of the defaults so far in 2018, 11 have involved privately owned companies, while one was a state-owned enterprise, Fitch records show.

Compared with private companies, state-owned enterprises usually have stronger debt financing capabilities, and when there is a risk of default, the government is more motivated to support state-owned companies, said Wu Jin, vice president of the company financing department at Moody's.

A rating agency analyst told Caixin that lower-rated private companies have been facing difficulties in bond sales since the second quarter of last year.

Oftentimes companies have had bond sales plans approved by regulators but couldn’t find buyers before the approvals expired, the analyst said.

Recently, an issuer with a AA rating guaranteed by a company with a AAA rating offered an 8.5% fixed-rate coupon for 400 million yuan of bonds, but eventually sold less than half of the bonds, the analyst said.

Analysts expect more defaults in the real-estate sector, with nearly 900 billion yuan of bonds due to mature in 2018 and 2019.

The real-estate sector has been facing tighter financing conditions, which has lowered their capability to repay obligations, said Wang Wei, the general manager of credit rating agency China Chengxin Securities Rating Co.

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