Caixin
Jan 20, 2020 08:47 PM
DAILY CHART

Charts of the Day: More Bonds, More Defaults

Corporate bond defaults hit a record high in 2019 amid slowing economic growth and increasing financial pressure on the private sector.

According to a January report from China International Capital Corp. (CICC), 42 companies went into default for the first time last year. Overall, there were 169 newly defaulted bonds, involving total principal of 153.5 billion yuan ($22.4 billion), up from 116 defaults involving 117.1 billion yuan in 2018.

COTD chart-1

Since China recorded its first corporate bond default in 2014, the country had seen a total of 369 as of the end of last year, involving principal of 344 billion yuan, CICC analysts said in the report. The value of the defaulted bonds accounted for about 1.6% of the total issued by nonfinancial companies.

Most of the defaulting companies are privately held, rather than state-owned enterprises (SOEs). These companies are more vulnerable than state-owned SOEs in an economic slowdown as lenders tend to consider SOEs lower-risk, continuing to fund them on the assumption that there is an “implicit guarantee,” which means governments will come to their rescue if they are caught in a crisis. Poor risk management by privately owned companies and regulatory efforts to reduce debt levels in recent years have also added to default risks.

From January to November, privately owned companies accounted for 77.8% of all the new defaulters, said a report (link in Chinese) by ratings agency Golden Credit Rating International Co. Ltd.

Bond investors are now reluctant to buy bonds issued by privately owned companies after so many defaults, Zhang Xu, chief fixed-income analyst of Everbright Securities Co. Ltd., told Caixin.

China’s bond market has boomed over the last few years to become the world’s second largest, with 99.1 trillion yuan of outstanding onshore bonds as of the end of 2019, central bank data (link in Chinese) show. The year saw issuance of 45.3 trillion yuan in new bonds, up 3.1% from the previous year, including 9.7 trillion yuan of corporate bonds, accounting for 21.4% of the total.

COTD chart-2

Another problem facing bond investors is the slow process for handling bond defaults. An underdeveloped junk bond market and limited trading channels for defaulted debts have made it difficult for holders of defaulted bonds to recoup their losses.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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