A two-year bull run in corporate bond prices built on stable, low funding rates has reversed, bringing risks in China’s bond market into focus. Rising instances of corporate bond defaults, 62 uncovered by our research, have tested implicit state guarantees and suggest a far tougher environment for corporates to roll over debts, as well as slowing overall credit growth.
Key takeaways include:
Default incidents rising: Our research accounts for 62 default events since 2014 involving total principal of 50.8 billion yuan. Corporate defaults are dominated by local SOEs, particularly in overcapacity-plagued industries, and shorter-term bond issues. Default resolutions remain haphazard, with no coherent framework for sharing losses among investors.
Funding constraints pressure bond prices, issuance: Higher short-term funding rates led by central bank tightening efforts are shrinking demand for bonds. In an environment of tighter liquidity, banks are less willing to lend to yield-seeking NBFIs, thereby decreasing demand for and slowing issuance of corporate bonds.
Signs of credit risk pricing, counterparty risk concerns: Exposure to defaults, as well as tighter regulation on banks and non-banks, is triggering new pricing of credit risks and segmentation of funding markets for some riskier banks and NBFIs. This will impact the overall credit impulse in the economy, by narrowing a key channel for corporate financing and important sources of banks’ asset growth in recent years.
