27.09.2022

China is waiting for a record number of corporate defaults

The number of defaults on corporate bonds in China is expected in 2018 will reach a new high amid tightening measures in the framework of the campaign of Beijing to reduce the debt. It is reported Caixin.

“Default risk has increased due to more stringent regulation, and investors should be fully aware of the possibility of a vicious circle caused by the credit crisis and the deterioration of market confidence, which will lead to further defaults,” – said the head of China Chenxin Asia Pacific Ratings Yan Yan.

Default risk is particularly high due to the large number of bonds maturing in 2020, said Yang. In total by the end of this year will be the deadline for the repayment of bonds in the amount of 5.68 trillion yuan. In 2019 will be the deadline for the redemption of bonds more by 3.86 trillion yuan, in 2020 – by 3.66 trillion yuan.

Analysts have warned about the negative consequences of policies to reduce excessive leverage, which ultimately should increase the stability of the financial system of China. Investors should also fear the side effects of such a policy for offshore bond market, experts say.

“Some of these side effects has already occurred. Private oil company China Energy Reserve and Chemicals Group in the message to the Hong Kong stock exchange on 25 may announced that she would not be able to make scheduled payment on its bonds for $350 million, citing a liquidity crisis, writes Caixin. – Default has raised concerns about further defaults, as the company said that the missed payment could cause cross-defaults in five other offshore debt securities”.

Previously, the Agency Bloomberg reported that since the beginning of the year, the market experienced a 14 defaults on corporate bonds.

“New defaults on corporate bonds is especially probable among those of developers and LGFV, which relied on mechanisms of shadow banking for their funding,” warned research firm Rhodium Group.

LGFV (local government financial vehicles) – specially designed firms affiliated with local authorities and used to Finance them.

As reported “Vesti.Economy”, more and more Chinese companies are concerned about tighter credit conditions, which leads to higher borrowing costs and a gradual increase of defaults on corporate bonds.

The people’s Bank of China announced earlier that it will accept corporate bonds with a lower rating as collateral for transactions medium-term loans (MLF). According to analysts, partly this decision is aimed at restoring confidence in the corporate bond market in the country.

The extension of collateral for the MLF “calm the market, but we still expect individual cases of default, especially for companies with weak finances, as the reform aimed at the reduction of debt in the financial sector continues,” said economist at ING iris pang, quoted by Reuters.

Beijing will do everything possible to avoid mass defaults, but another risk is that the negative sentiment towards Chinese corporate bonds can be a negative factor for the debt of emerging markets. This can lead to even greater outflow of capital from emerging markets and new complaints of Central banks of developing countries, asking the fed to stop tightening.

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