Complicating the recent turmoil in China’s corporate bond market, the now-restructured Baoshang Bank has recently defaulted on a legacy 6.5 billion yuan subordinated tier-2 capital bond, the first such default in China’s banking system carrying 100% losses for bondholders, including accrued interest. While this probably should have been expected, some market participants were still expecting a partial recovery.
Baoshang’s default occurs just as the PBOC has recently outlined an initial roadmap toward the resolution of distressed financial institutions. But the default will complicate small banks’ ability to raise capital, and will slow overall credit and asset growth. Including Baoshang’s default, the recent stress in China’s credit markets is ultimately the result of years of rapid debt growth, and credit risks are now spreading to new asset classes.
