Bond de­fault risks ris­ing for cor­po­rates

China Daily - - BUSINESS - By CHEN JIA chen­jia@chi­nadaily.com.cn

Economists fore­cast that more bond de­faults may oc­cur in the com­ing months, which re­flects the gov­ern­ment’s ef­forts and con­fi­dence for delever­ag­ing.

Global credit rat­ings agency Fitch Rat­ings said in a re­port that cor­po­rate bond de­faults are ex­pected to con­tinue in China’s on­shore mar­ket dur­ing the rest of this year and stretch the tol­er­ance lev­els of pol­i­cy­mak­ers.

Ac­cord­ing to the agency’s es­ti­mates, about 4 tril­lion yuan ($628 bil­lion) of bonds, which were is­sued in 2015 and 2016 when credit con­di­tions were loose and the bond mar­ket en­try bar­ri­ers were low, will be­come due in 2018 and 2019 re­spec­tively.

Sig­nals are in­di­cat­ing tight­ened credit con­di­tions and con­tin­ued delever­ag­ing, in line with the gov­ern­ment’s “neu­tral and pru­den­tial” mon­e­tary pol­icy, it said.

On Thurs­day, the Min­istry of Fi­nance and the Na­tional De­vel­op­ment and Re­form Com­mis­sion, the na­tion’s top eco­nomic reg­u­la­tor, jointly warned Chi­nese cor­po­rates to guard against debt risks, es­pe­cially those who have bor­rowed medium to longterm for­eign debt.

“Cor­po­rates are for­bid­den to take guar­an­tees from lo­cal gov­ern­ments,” said a no­tice pub­lished on the NDRC web­site, an in­di­ca­tion that com­pa­nies should re­pay bor­rowed funds and take risks on their own.

The gov­ern­ment’s warn­ing is aim­ing in par­tic­u­lar to sep­a­rate cor­po­rate debt from lo­cal gov­ern­ment debt in order to re­duce the lo­cal gov­ern­ments’ con­tin­gent li­a­bil­i­ties, ac­cord­ing to Daisy Lu, an an­a­lyst with Moody’s In­vestor’s Ser­vice, an­other global credit rat­ings agency.

The warn­ings came after 10 do­mes­tic bond is­suers re­ported de­faults to­tal­ing 14.6 bil­lion yuan by the first week this month, as against 18 de­faults in­volv­ing 39.3 bil­lion yuan for the whole of 2017.

Wang Ying, se­nior di­rec­tor of the cor­po­rate depart­ment at the Shang­hai branch of Fitch Rat­ings (Bei­jing) Ltd, said: “The in­creased in­ci­dence of cor­po­rate de­faults re­flects the gov­ern­ment’s ef­forts to con­tain lever­age and re­duce com­plex­ity in the fi­nan­cial sys­tem, par­tic­u­larly through a clam­p­down on shadow-fi­nanc­ing ac­tiv­i­ties”.

Lower-rated cor­po­rate bond is­suers, which are usu­ally pri­vately owned com­pa­nies with weaker abil­ity to ac­quire bank lend­ing, will face greater chal­lenges within two years — a heav­ily con­cen­trated pe­riod of bond ma­tu­ri­ties.

Ming Ming, an an­a­lyst with CITIC Se­cu­ri­ties, said that the cor­po­rate bond de­faults are “surely the price that one needs to pay when banks are shrink­ing their bal­ance sheets and shadow-bank­ing is re­treat­ing due to tighter ac­count­ing stan­dards”.

The high level of lever­age in China’s cor­po­rate sec­tor was fu­eled by fast-ex­pand­ing lo­cal gov­ern­ment fi­nanc­ing ve­hi­cles, es­pe­cially for in­fra­struc­ture con­struc­tion and prop­erty in­vest­ment projects dur­ing the credit boom three years ago, said Ming.

A pos­si­ble wave of de­faults could oc­cur in the com­ing months if bond is­suers are un­able to re­fi­nance the in­stru­ments due to lim­ited al­ter­na­tive fi­nanc­ing chan­nels, es­pe­cially when the reg­u­la­tors are crack­ing down on shad­ow­bank­ing lend­ing and con­strain­ing credit growth, said ex­perts.

De­fault risks are also in­creas­ing as in­vestor pref­er­ence is slowly shift­ing to­ward higher-rated credit and Sta­te­owned en­ter­prises, they said.

A re­port from China’s cen­tral bank in­di­cated that by the end of 2017, the debt-toGDP ra­tio of the coun­try’s cor­po­rate sec­tor was 159 per­cent, down by 0.7 per­cent­age points from a year ear­lier, the first an­nual drop in six years. The ra­tio used to rise at an av­er­age of 8.3 per­cent­age points per year from 2012 to 2016.

The in­creased in­ci­dence of cor­po­rate de­faults re­flects the gov­ern­ment’s ef­forts to con­tain lever­age ...”

Wang Ying, se­nior di­rec­tor of the cor­po­rate depart­ment at the Shang­hai branch of Fitch Rat­ings (Bei­jing) Ltd

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