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Chinese Corporate Bond Defaults Rise With 19 Failures So Far This Year

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As China Inc. deleverages, corporate bond defaults are on the rise this year. As of May 7, a total of 19 domestic corporate bonds have defaulted, compared to 49 bond defaults for all of 2017, according to Chinese data provider Wind.

The amount of Chinese domestic corporate bond defaults remains tiny when compared to the total Chinese bond market. The 19 bond defaults this year involved 10 issuing companies with combined face value of just over RMB13 billion (US$2 billion).

At the end of March, the Chinese bond market had total outstanding value of RMB76.7 trillion (US$12 trillion), of which corporate debt had outstanding value of RMB17.4 trillion (US$2.7 trillion), according to People’s Bank of China.

Of the 10 defaulted Chinese issuers, four were listed companies. On May 7, Shenzhen-listed Kaidi Ecological and Environmental Technology and Shanghai-listed China Security & Fire reported that they had failed to pay a RMB698 million (US$109.56 million) and a RMB94.41 million (US$14.82 million) bond, respectively.

On May 4, Shenzhen-listed Chinese environmental technology firm Shenwu Technology Group said it failed to provide additional collateral to its outstanding bonds, while a day earlier, Shenzhen-listed Anhui Shengyun Machinery Co. Ltd. said it defaulted on debt of more than RMB457 million (US$71.74 million).

"Some companies expanded too fast in the past when cheap capital was readily available, but they haven’t generated enough cashflow to catch up with their liabilities," Li Qilin, a general manager at Lianxu Securities told to local media outlet 21 Century Herald.

One driver behind the rise in corporate defaults is that many local governments that previously were willing to help distressed companies have stopped offering help, taking their cue from Beijing to enforce "deleverage" across the economy, an analyst told local media.

The Chinese central government previously warned that local governments are not allowed to provide guarantees for corporate debt.

The rising defaults are making investors more cautious. Some say that they now only invest in bonds with AAA rating. They would also pay more attention to companies’ financials and other fundamentals to better assess their creditworthiness.


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