It’s All Suddenly Going Wrong in China’s Bond Market
The unprecedented boom in China’s $3-trillion corporate bond market is starting to unravel.
Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have cancelled 61.9 billion yuan ($9.6 billion) of bond sales in April, and S&P’s is cutting its assessment of Chinese firms at a pace unseen since 2003.
While bond yields in China are still well below historical averages, a sustained increase in borrowing costs could threaten an economy that’s more reliant on cheap credit than ever before. The numbers suggest more pain ahead: Listed firms’ ability to service their debt has dropped to the lowest since at least 1992, while analysts are cutting profit forecasts for Shanghai Composite Index companies by the most since the global financial crisis. “The spreading of credit risks is only at its early stage in China,” said Qiu Xinhong, a money manager at First State Cinda Fund Management Co. “Many people have turned bearish.” Economic figures for March reveal a g rowing dependence on debt. China’s aggregate financing almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey.
Yet even that wasn’t enough to save the seven Chinese companies that re- neged on bond obligations this year. Three were part-owned by China’s government, seen not long ago as a provider of implicit guarantees for bondholders. Dongbei Special Steel Group on April 13 missed a third pay- ment,whileChinacoalGroupShanxi Huayu Energy failed to make a distribution on April 6. ThereactionhasbeenswiftinChina’s 18.8trillionyuancorporatebondmarket.Theextrayieldinvestorsdemand to hold seven-year onshore corporate bonds with top ratings over similarmaturity government notes has jumped by 28 bps to 91 bps as of Monday. At least 64 firms have postponedorscrappedplannednotesales.
“To Chinese investors at the moment, default risks are high almost everywhere,” said Shi Lei, the head of fixed-income research at Ping An Securities Co. The yield premium on corporate bonds will probably rise by 30 to 50 bps over the next several months, Shi said.