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China’s $4tn corporate bond market is ticking ominously. Last year set a new record for defaults. This year the figure is likely to be higher still. Beijing wants to reform the market, reducing leverage at the same time. This perilous situation is set to worsen before it gets better.
After years of debt-driven corporate spending, defaults on Chinese offshore bonds are surging. The figure of $2.7bn recorded in January is about one-third of last year’s total. The biggest contributor was a $2bn default by semiconductor company Tsinghua Unigroup.
Stakes are high for foreign investors. Dollar bond issuance has swelled as Chinese companies rushed to secure offshore funding. More than $100bn worth of bonds will mature in the offshore market this year.
Foreign holdings of onshore bonds are at a record high too. Total defaults reached a record of almost $30bn last year. Expect the number to hit new peaks this year. More than Rmb7tn ($1.1tn) worth of onshore bonds are set to mature. Nearly a fifth of these belong to companies with weakened balance sheets, according to rating agency Fitch.
The debt maturity cliff is looming at a time when Chinese companies and state-linked issuers are finding refinancings tougher to get away.
Defaults were once a rarity in Chinese bond markets thanks to bailouts that allowed delinquent companies to keep on borrowing. The defaults of several state-run companies last year are a red flag. Bonds once seen as carrying implicit guarantees from local governments may have lost these backstops.
Beijing has restarted deleveraging plans stalled by the pandemic and the blow it dealt to economic growth. The People’s Bank of China has been signalling monetary policy may not be as accommodating as expected. It withdrew liquidity from the banking system last week.
Debt maturity cliffs have a habit of proving surmountable. China is adept at avoiding wholesale credit crises. But markets are still shaping up for an unprecedented surge in defaults. Buckle up bondholders. You could be in for a bumpy ride.
The Lex team is interested in hearing more from readers. Are China bonds entering a danger zone? Please tell us what you think in the comments section below
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