Corporate defaults in China hit record in 2019

Corporate defaults in China surged to a record high in 2019, raising new questions over how policymakers in Beijing will manage mounting financial distress among large private and state-owned companies.

Onshore corporate defaults reached Rmb130 billion ($27.8b) in the final weeks of the year, breaking the record of Rmb122b last year, according to data compiled by Bloomberg, as economic growth fell to a three-decade low.

Private companies that expanded rapidly in recent years, accruing large piles of debt, have been at the heart of the explosion in corporate distress.

Some of the country’s leaders in sectors such as chemicals and textiles have faced financial pressures in recent weeks.

Defaults on US dollar-denominated bonds, which until recently were closely guarded with implicit state guarantees, have hit US$2.9b ($4.3b) this year, according to data from S&P Global Ratings.

Private sector defaults have been concentrated in industries heavily reliant on shadow bank funding — an area of the Chinese financial system where access to credit has tightened greatly over the past two years — and are now suffering from oversupply.

Experts are now debating how much support state-backed companies will receive from the Government in the new year after a warning from a central bank adviser over a chain reaction in missed payments.

“The 2020 wish lists for China’s local government officials are likely to include new bailouts of local debt,” Logan Wright and Allen Feng of independent researcher Rhodium Group wrote in a report this month. “But the debt levels are just too large at this point.”