China expects record number of corporate defaults

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

“The risk of default has grown due to tighter regulation, and investors should be fully aware of the possibility of a vicious cycle caused by the credit crisis and deteriorating market confidence, which will lead to further defaults,” said Yan Yan, head of China Chenxin Asia Pacific Ratings.

The risk of default is especially high due to the large number of bonds maturing in 2020, says Yan. In total, by the end of this year, the maturity date of bonds in the amount of 5.68 trillion yuan. In 2019, the bonds mature in another 3.86 trillion yuan, and in 2020 by 3.66 trillion yuan.

Analysts warn of the negative effects of policies to reduce excess leverage, which should ultimately increase the stability of China’s financial system. Investors should also be wary of the side effects of such a policy for the offshore bond market, experts say.

“Some of these side effects have already occurred. A private oil company, China Energy Reserve and Chemicals Group, in a message to the Hong Kong Stock Exchange on May 25 announced that it would not be able to make a planned payment of its $ 350 million bond, citing a liquidity crisis, Caixin writes. “The default raised concerns about further defaults, as the company said that a missed payment could cause cross-defaults on five other offshore debt securities.”

Earlier, Bloomberg reported that since the beginning of the year there have been 14 defaults on corporate bonds in the market.

“New defaults on bonds are especially likely among developers and LGFVs who relied on shadow banking mechanisms to finance themselves,” warned Rhodium Group, a research company.

LGFV (local government financial vehicles) – specially created companies, affiliated with local authorities and used to finance them.

According to Vesti.Ekonomika, more and more Chinese companies are concerned about tightening credit conditions, which leads to an increase in borrowing costs and a gradual increase in defaults on corporate bonds.

The People’s Bank of China has previously announced that it will accept lower-rated corporate bonds as collateral in medium-term lending (MLF) operations. According to analysts, this decision is partly aimed at restoring confidence in the country’s corporate bond market.

Extending collateral for MLF “will calm the market, but we still expect some cases of default, especially for companies with weak finances, as the reform aimed at reducing debt in the financial sector continues,” says ING economist Iris Pang, quoted by Reuters.

Beijing will do everything possible to avoid massive defaults, but another risk is that a negative mood towards Chinese corporate bonds could be a negative factor for debt from emerging markets. This could lead to an even greater outflow of capital from emerging markets and new complaints from central banks in developing countries asking the US Federal Reserve to stop tightening policies.

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