Chinese corporate credit spreads have narrowed since the outbreak of COVID-19, despite the dramatic impact of virus-related economic shutdowns on corporate cash flows and revenues. Abundant liquidity from the PBOC in February flooded capital markets and pushed yields and credit spreads lower, in the absence of real credit demand. Now that activity is normalizing, liquidity is leaving financial markets, fundamentals are reasserting themselves, defaults are rising, and spreads are likely to widen again. Bond defaults are estimated to reach 200 billion yuan this year, driven by larger volumes of maturing bonds and weakening corporate cash flows. Property developers are the most likely source of defaults, while consumer discretionary firms and automakers are also at risk.
