Quick Take: China Seeks to Make It Easier to Deal With Defaults

China plans to launch a trading mechanism for defaulted bonds in an effort to beef up the country’s capacity to dispose of delinquent debt, a central bank official said on Tuesday.

The decision indicates that regulators are growing more tolerant of defaults as a rising number of Chinese companies struggle to repay their debts amid a national deleveraging campaign. 

Bond defaults are good for the long-term development of the Chinese financial markets, said Pan Gongsheng, administrator of the State Administration of Foreign Exchange (SAFE) and deputy governor of the People’s Bank of China (PBOC).

The trading mechanism will bring in more asset managers to deal with the soured bonds, Pan said at a forum in Hong Kong. China will also improve legal proceedings on default cases, encourage issuers to declare cross-defaults to protect investors, and improve the efficiency of disposing of bonds in default, he said.

Pan didn’t provide a timetable or further details about these measures.

Analysts project the number of corporate bond defaults will reach a new high this year, as tighter credit and rising borrowing costs squeeze overextended domestic companies with weak funding bases. 

Corporate borrowers have missed payments on 24 domestic bonds this year, according to data compiled by Hithink Royalflush Info. There were about 66.3 billion yuan ($9.96 billion) worth of outstanding bonds in default at the end of May, or 0.39% of outstanding corporate bonds, according to the PBOC.

Pan criticized the implicit guarantees that make investors believe they would receive a bailout if the bonds they have invested in were to default.

Contact reporter Leng Cheng (Chengleng@caixin.com)