"Chinese companies are defaulting on bonds in record numbers," writes Nathaniel Taplin in The Wall Street Journal. Private-sector businesses have been hit by both the trade war and a government crackdown on shadow banking. The result is that their default rate was 4% during the first 11 months of this year, compared with less than 1% two years ago. The fallout has so far been limited. But if the trouble spills over into the market for debt issued by state-owned enterprises (SOEs), which account for 90% of the bond market, we could be in for much bigger ructions.
Tewoo Group, a commodities trader, this month became the first Chinese state-owned business to default on its offshore debt in two decades, says Narayanan Somasundaram in the Nikkei Asian Review. Investors had assumed that "China would backstop its corporate enterprises and prevent an offshore bond default".
Yet there is so much debt sloshing around the system that at a time of falling tax revenues the government cannot afford to bail out everyone. China is also alert to the risk of "moral hazard", says Xie Yu in The Wall Street Journal. A blanket bailout guarantee only encourages "risky bets made in the belief" that the state will foot the bill if things go wrong. With overall debt levels above 300% of GDP, Beijing can no longer extend "blithe assumptions of state support" to every SOE.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The new default trend is probably a good thing, says The Economist. "Defaults are part of any efficient bond market," making investors sensitive to risk and ensuring that they steer funds towards the best firms. Yet the "chasm" between default rates in the private and state-owned parts of the economy raises the risk that it is not the most deserving, but the most well connected, that can secure easy funding.
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
What is the 25% pension tax-free cash - and when should you take it?The 25% tax-free cash that savers can take from their pension pots got plenty of airtime in the run-up to the Autumn Budget, with speculation that it could be cut or axed. But, what is it and how does it work?
