Chinese Corporate Bond Defaults Set to Rise to Record High in 2018

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China is on track to hit a record high for corporate bond defaults in 2018, as credit agencies turn dour on the prospects of domestic companies.

Chinese corporations have already defaulted on around 16.5 billion yuan (approx. USD$2.5 billion) in public bond payments since the start of 2018, which is over three quarters of the previous high of 20.7 billion yuan seen in 2016 according to data compiled by Bloomberg.

Borrowers have failed to make payments on at least 20 domestic bonds in 2018, with around 66.3 billion yuan of defaulted notes outstanding as of the end of May, accounting for 0.39% of corporate bonds outstanding.

These defaults are set to worsen in the estimation of China’s credit ratings agencies, which have downgraded a slew of firms to an unprecedented extent.

Dagong Global Rating Co. has downgraded 13 companies this year, as compared to 10 upgrades, while China Chengxin International Credit Rating Co. and China Lianhe Credit Rating Co. have

According to analysts key reasons for the defaults include waning corporate profits as the Chinese economy slows, in tandem with Beijing’s ongoing crackdown on China’s shadow banking sector, which has pushed the cost of funds higher and made refinancing more difficult.

Rising yields have been especially vexing for private companies who need to refinance maturing debt, but find it difficult to borrow from China’s state-dominated banking system which is more inclined to provide funds to state-owned enterprises.

A record high year for corporate bond defaults in China could be a positive sign, however, that Chinese regulators are more willing to let market forces determine the fate of struggling companies, instead of staging official interventions.

Pan Gongsheng, director of the State Administration of Foreign Exchange, recently said that bond defaults will be good for the long-term development of Chinese markets.

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