(Bloomberg) – Chinese companies are defaulting on fastest-rate local bonds on record, as authorities redouble their efforts to introduce more financial discipline and transparency in the world’s second-largest debt market.
So far this year, the companies have not made payments on 99.8 billion yuan ($ 15.5 billion) of onshore bonds, according to data compiled by Bloomberg. While 2021 is expected to be the fourth year in a row, the 100 billion yuan level was surpassed, but it did not happen until September. For the whole of 2015, when the Chinese stock market collapsed, defaults totaled only 8.9 billion yuan.
Missed payments are rolling out at a record pace this year, following defaults at the end of 2020 of some state-linked companies which confirmed their beliefs that Chinese authorities are increasingly willing not to bail out weak companies . The recent uproar surrounding bad debt manager China Huarong Asset Management Co. has raised new questions about support for central state-owned enterprises, even as contagion risk remains relatively contained. Signs of a mature credit market have helped Chinese authorities refocus on financial risks in areas such as asset prices and debt levels.
Ultimately, more defaults are part of a healthy credit market with a true high-yield onshore sector and adequate risk pricing, according to Jean-Charles Sambor, head of emerging debt at BNP Paribas Asset Management.
“Policymakers are prepared to draw a line in the sand between what is systemic and what is not,” he said. “They want to inject more credit risk into the system and change the mindset of investors, forcing them to look more at stand-alone credit risk rather than speculating on the likelihood of central government support.”
Defaults are essential to help develop a mature and efficient market that improves transparency, reduces moral hazard, and prompts re-evaluation of risk. Increased financial discipline for companies and improved credit ratings serve Beijing’s longer-term goal of attracting more foreign liquidity to the country’s financial markets – especially from more stable sources like pension funds and financial institutions. insurers instead of hot money flows.
China’s central bank, in its first quarter monetary report released on Tuesday, urged the establishment of a mechanism that holds local party and government leaders accountable for major financial risks.
Developer default settings
Real estate companies are leading the surge in onshore bond defaults this year, as authorities tighten access to finance in the indebted sector. Promoters accounted for around 25% of these missed payments, as the government’s “three red lines” policy increasingly weighed on these borrowers. Payment failures at China Fortune Land Development Co. and Tianjin Real Estate Group Co. exceeded 10 billion yuan in the first quarter, according to data compiled by Bloomberg. They also did it for chipmaker Tsinghua Unigroup Co. and Hainan Airlines Holding Co.
Offshore bond defaults have also risen – totaling $ 3.7 billion in January and February, but none since, according to data compiled by Bloomberg. Yet that is almost half of the $ 8.3 billion in 2020.
(Add details of central bank report in seventh paraphrase.)
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