Defaults have surged in China’s corporate bond market in 2019 despite a recovery in cyclical momentum and credit growth earlier this year. In previous years, bond defaults were the byproduct of companies losing access to credit under tightening of shadow banking channels from Beijing’s deleveraging campaign. Now, weaker corporate fundamentals are driving this cycle of rising defaults.
Property developers and construction companies contributed the bulk of the increase in defaults this year and these failures are likely to continue because of the tightening credit environment for the industry. Local governments and their related companies (LGFVs) are also at risk. Market tensions between risk aversion and yield-chasing behavior are sending China’s long-term yields lower, and the curve is flattening, risking inversion. PBOC interest rate cuts will be necessary for the entire yield curve to shift lower.
