More Bond Defaults Expected as Chinese Banks Withdraw Support for Corporate Debt

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Analysts see bond defaults continuing in China as Beijing’s deleveraging campaign prompts banks to scale back lending for purchases by other institutions, as well as divest their own balance sheets of corporate debt.

China has seen a rash of corporate bond defaults since the start of 2018, which observers say is likely the result of refinancing difficulties created by Beijing’s concerted deleveraging campaign.

According to Logan Wright, Hong Kong-based director at research firm Rhodium Group LLC, the defaults are set to continue as Chinese banks scale back their holdings of corporate debt, and dial down lending to firms that purchase bonds.

“You have seen banks redeeming funds placed with non-bank financial institutions that have reduced the pool of funds available for corporate investment overall,” said Wright to Bloomberg.

Loans by banks to other financial firms saw three straight months of decline after January for a total drop of 1.7 trillion yuan, throttling a key source of leverage for corporate bond purchases.

Wright said that the shadow banking crackdown is likely to create further bond defaults, especially amongst property developers and local government financing vehicles.

China’s bond market is also expected to come under pressure from banks offloading their own holdings of corporate debt.

According to Citic Securities Chinese banks held around 12 trillion yuan of corporate bonds either on or off balance sheets as of the end of 2017, accounting for around 70% of outstanding issuance.

China’s lenders have been making haste to offload this exorbitant debt, with the country’s four biggest banks slashing their bond holdings by 20% in 2017 to 4.1 trillion yuan.

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