China’s Private Sector Struggling Amid Corporate Bond Defaults

Market conditions in China are poised to cause another wave of corporate bond defaults, according to recent Financial Times (FT) reports, which pointed to maturing issuance and a lower risk appetite combining to possibly continue a wave of defaults seen last year.

According to the publication, billions of renminbi in corporate bonds will mature this year, and government officials are beginning to recognize the struggles of private companies in China. Last year, nearly 90 percent of defaults were on bonds issued by the private sector. Reports noted that the statistics reflected the disproportionate impact of tighter credit requirements on private firms.

China saw $22.3 billion in defaults last year, reports said.

Now, the People’s Bank of China has agreed to lower the capital reserve requirement ratio, which will unlock more than $118 billion for banks to support smaller businesses (SMBs). However, bond yield data has suggested that a gradual loosening of monetary policy has yet to make an impact on the private sector, reports noted.

Still, the Chinese government is said to be planning additional moves this year to loosen monetary policy. Reports said that will likely entail additional reserve requirement cuts, and introduce new measures to support private businesses’ ability to borrow.

“Although the government is also pledging more corporate tax cuts, their scale is unlikely to be enough to offset growing investor concerns about the credit risks surrounding corporate bonds,” the publication stated.

Last year, Reuters highlighted the role of corporate bond defaults in complicating the nation’s overall economic outlook. By August 2018, 16 Chinese corporations, most of which are private, defaulted on 34 corporate bonds worth $5.5 billion. That compares to just 30 defaults worth $3.81 billion for the entirety of corporate bond defaults in 2017.

“China’s corporate debt challenges remain a key downside risk to medium-term growth,” reflected Brian Coulton, chief economist at Fitch, at the time. “Investment needs to slow sharply to reduce corporate borrowing. Such an adjustment would take a big toll on GDP growth, given that business investment is equal to a quarter of GDP.”