Deleveraging Campaign the Culprit Behind China’s Latest Wave of Bond Defaults

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Analysts say the latest wave of defaults on the Chinese bond market is due to the difficulty of refinancing experienced by some companies in the wake of Beijing’s concerted deleveraging campaign.

Since the start of 2018 a total of 11 entities have succumbed to 21 bond defaults, involving a sum of nearly 19 billion yuan.

The latest company to default on its debt is CEFC Shanghai International Group, a subsidiary of the beleaguered China CEFC Energy, which announced that it missed bond payments totalling 2.09 billion yuan (approx. USD$327.3 million) on Monday.

Analysts say the current wave of bond defaults is distinct from the previously episode in 2016, which primarily affected government entities such as central  and local state-owned enterprises.

The present round of defaults has been concentrated amongst non-government listed companies, with the chief factor being the difficulty that many are experiencing when it comes to refinancing as a result of Beijing’s ongoing deleveraging campaign and heavier pressure from regulators.

The 2018 Q1 Monetary Policy Execution report issued by the People’s Bank of China points to a marked easing in the growth of China’s macro-leverage levels.

In 2017 macro-leverage rose by 2.7 percentage points to 250.3%, as compared to an average annual increase of 13.5 percentage points during the period from 2012 to 2016.

Last year the corporate sector debt ratio was 159%, for a year-on-year decline of 0.7 percentage points, and the first dip since 2011.

“The main driver of the current wave of defaults is an increase in refinancing pressure,” said Haitong Securities chief economist Jiang Chao (姜超) in a recent report. “Whether or not the wave of defaults will recede depends upon whether financing channels loosen up again.”

Jiang further points out that refinancing pressure and the wave of defaults will constrict corporate bond issuance moving ahead.

“Compared to state-owned enterprises, it’s much harder for private enterprise to obtain bank loans, and their reliance upon direct financing is higher,” said Jiang.

“However in 2017 as a result of ongoing adjustments to the bond market, many entities that wanted to issue bonds were forced to cancel issuance, refinancing was blocked, and credit events amongst private enterprises increased.

“This led to the market becoming more cautious with respect to private enterprise debt, leading to a  vicious cycle.”

The vicious cycle has continued in 2018, with data from Wind indicating that there have been a total of 314 bond issuance deferrals or cancellations since the start of the year, worth a total of 193.33 billion yuan.

The month-long period from 22 April to 22 May alone accounted for a third of this amount, with 109 bond issuance deferrals or cancellations involving a total sum of 68.24 billion yuan.

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