China’s ongoing deleveraging campaign has severely pressured corporate balance sheets, resulting in an increase in both credit risk warnings and defaults in China’s bond market, concentrated in heavy industries and construction. As the volume of risk warnings grows and local government financing channels are further restricted, we expect more explicit defaults through the rest of the year. Even though credit spreads on lower-rated bonds are widening, yields on higher-quality bonds are falling below loan rates, driving more bond issuance.
