China is on track to post one of its worst years for corporate bond defaults after a coal miner in the country’s north failed to make good on its debts.
Shanxi province coal miner Wintime Energy has emerged as China’s biggest defaulter in what’s set to be a record year for corporate bond upsets, welching on 11.4 billion yuan of securities following failure to pay a local bond this month.
The miner has seen its debt load quadruple in less than five years to hit 72.2 billion yuan in total according to a report from The South China Morning Post, after a drop in borrowing costs from 2014 prompted it to embark upon an acquisitions and expansion spree into finance and logistics.
During the same period China’s domestic bond market became the world’s third biggest at around USD$12 trillion in scale, as regulators pushed for firms to use direct financing instead of depend upon bank lending.
According to analysts this sudden push for direct financing is a key reason for the current spate of corporate defaults, given that local investors and debt-rating agencies lack experience with bond markets, and the Chinese government only began to allow defaults starting from 2014.
Once President Xi Jinping launched a concerted deleveraging campaign and Beijing staunched liquidity, the conditions were in place for a record run of corporate defaults.
Wintime’s recent borrowing history epitomises this shift, with the company issuing over 10 billion yuan in both 2016 and 2017 yet just 3.6 billion yuan this year, as borrowing costs for one-year bonds rose to 7% as compared to 4.5% two years ago.
Bloomberg data indicates that Chinese corporations had defaulted on around 16.5 billion yuan (approx. USD$2.5 billion) in public bond payments in the first half of 2018, or more than three quarters the prior record high of 20.7 billion yuan seen in 2016.
According to Qin Han, chief fixed income analyst at Guotai Junan Securities, the defaults are set to continue before the year’s end.
“China’s economic growth was largely driven by debt and its corporate debt looks like a Ponzi scheme,” said Qin Han to SCMP. “More firms may give up on repaying debt if they encounter financing difficulties.”
Analysts have previously speculated that further corporate bond defaults tilt the odds in favour of the Chinese central bank implementing further cuts to the required reserve ratio prior to the year’s end.