China defaults set to worsen as Us$8.6bil bonds due next year

HONG KONG: A record pace of defaults hit China’s domestic bonds this year. In 2020, it could be the offshore market’s turn.

That’s because of a looming wall of dollar debt, issued by now-stressed borrowers, that comes to maturity. There’s Us$8.6bil of offshore bonds coming due next year that currently have at least 15% yields -- classifying them as stressed, according to data compiled by Bloomberg.

Put another way, nearly 40% of total outstanding corporate dollar bonds from China’s most troubled companies is due next year. With Chinese policy makers emphasising the need to continue a campaign to limit leverage, it suggests a pick-up in defaults. For those lured by juicy yields in today’s low-rate universe, that means danger.

“This is a market where you want to go for safer bets rather than be a hero,” said Michel Lowy, chief executive officer at Hong Kongbased SC Lowy, which specializes in fixed income. “We are on the verge of a massive snowball effect,” where defaults spur funds to take money out of high-yield debt, driving up yields and making it all the harder for firms to refinance, he said.

Lowy advises sticking with companies with strong cash flows.

Trouble is, a swathe of the borrowers with debt due next year lacked strong fundamentals, and took advantage of unusually sweet financing conditions back in 2017 -- the year of the synchronous global expansion. That’s according to Wonnie Chu, managing director of fixed income at Gaoteng Global Asset Management Ltd. —