China’s maturing corporate bond market

Chinese companies are defaulting on their debt in record numbers. And the trouble could spread to state-owned enterprises.

Chinese soldier in front of Tiananmen Gate © Kevin Frayer/Getty Images
Beijing cannot afford to bail out everyone

"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.

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.

Recommended

China’s stockmarket bounces as the economic recovery quickens
China stockmarkets

China’s stockmarket bounces as the economic recovery quickens

China’s strong economic recovery has propelled local stockmarkets higher, with the CSI 300 index up 12% for the year-to-date.
9 Oct 2020
Investing in bonds: what are fallen angels and why have they been such good investments?
Sponsored

Investing in bonds: what are fallen angels and why have they been such good investments?

In the first of a series of articles on different aspects of investing in bonds, David explains what “fallen angels” – and what purpose they serve in …
28 Sep 2020
China’s bulls stampede as recovery gathers strength
China stockmarkets

China’s bulls stampede as recovery gathers strength

China's benchmark CSI 300 stockmarket index has gained 12% so far this year and is up by 32% since 23 March as the country's industrial and consumer r…
21 Sep 2020
China adds shine to base metals
Industrial metals

China adds shine to base metals

Metals prices have rallied hard after China's government unveiling plans for new infrastructure building, including railways, power lines and electric…
28 Aug 2020

Most Popular

How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020