Corporate Debt Rises As China Tries To Heal From Pandemic

Chinese policymakers have been trying to multi-task between fighting pandemic-related economic damage and fueling a new debt bubble from recent spending, according to Bloomberg.

The first onshore bond default came about in 2014, and since then, there have been 395 delinquencies. Of those, 31.9 percent failed to repay debts from 2016 — a prosperous year for the fundraising for onshore companies, Bloomberg reported, with yields falling as low as 3.49 percent.

Then came President Xi Jinping’s 2016 deleveraging campaign, which saw a crackdown on shadow banking and a tighter rule set for asset management.

Because of that, 80 percent of the delinquencies now are bonds in less than three years after being issued, and 109 of them failed to make payments within the last year, Bloomberg reported, which has the effect of aggravating the default risk when the debtor doesn’t repay what was owed even when cash flows were there.

The People’s Bank of China, China’s central bank, published rules on Wednesday (July 1) intending to tighten the procedures for disposal of credit card bond delinquencies, clarifying the rules for how bond trustees and meetings with creditors go, and making everything more market-oriented and transparent. That will be achieved through addressing issues with “trading of defaulted bonds on qualified platforms, supporting diversified channels, the use of credit derivatives and more information disclosures required,” Bloomberg reported.

Location-wise, Beijing led the pack with 75.3 billion yuan ($10.7 billion) in onshore debts, followed by Shanghai and Zhejiang.

The technology sector had the most defaults through June, Bloomberg reported, while real estate has seen almost none. That could be because of “a very favorable funding environment and a more controlled pace of expansion for developers,” according to Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore, Bloomberg reported.

“Moreover, some developers may have delayed their property deliveries, as allowed by local governments, thus limiting working capital outflows,” he said.

China’s corporate debt hit a record high for defaults in 2019, with corporate defaults hitting $18.6 billion.