China’s corporate bond defaults have hit a record high in 2021, underscoring growing tightening of credit and increased reluctance by regional governments to bail out troubled state-owned firms.
During the first half of this year, bond defaults by Chinese companies touched a record high of $9.67 billion (62.59 billion yuan), according to data from Fitch Ratings.
Defaults by state-owned enterprises have raised strong concerns among investors that the end of implicit government guarantees on SOE debt is likely to create market instability.
In the fist two quarters of this year, 25 Chinese companies defaulted on bond payments compared to 19 in the same period in the previous year, as per Fitch Rating’s data, with Chinese state-owned enterprises (SOEs) contributing to more than half of the defaults, totalling 36.65 billion yuan.
Concerns over the ability by SOEs to service their debts had sparked global alarm in April after China Huarong Asset Management missed a March 31 deadline for filing its 2020 earnings.
“SOE defaults could be a blessing in disguise by forcing the state companies to adhere to hard budget constraints and exercise greater credit discipline, the lack of which have been the culprits for excessive investment,” said Chi Lo, senior economist at BNP Paribas Asset Management. “Beijing has been signalling a gradual retreat from government guarantees on state firm liabilities since 2017 … But they have also reiterated that the bond default risk needs to be diffused in an orderly manner.”
Incidentally, large maturities loom in the second half of the year. Weak regional SOEs with deteriorating liquidity profiles is likely to significantly contribute to higher bond-repayment pressure, said Shuncheng Zhang, a Fitch analyst in Shanghai while adding, “But a surge in defaults is unlikely as central authorities guide distressed SOEs to negotiate repayment arrangements in advance”.
($1 = 6.4755 Chinese yuan)