Nasty surprises in Chinese corporate bonds

Beijing is allowing more state-owned firms to default on their debt, leading to some nasty surprises.

Trouble is afoot in China’s $15trn bond market, says Rebecca Choong Wilkins on Bloomberg. State-owned firms once enjoyed an implicit state guarantee, precluding defaults. Yet in recent years Beijing has allowed more to default. The aim is to allow debt markets to function normally and price risk more efficiently, but there have been surprises along the way. Last month Yongcheng Coal & Electricity became the tenth state firm to default this year when it missed a payment on a ¥1bn (£114m) bond, says The Economist. The news rocked markets as Yongcheng had recently been given a “top-notch” credit rating and was well connected to the powers that be. Debt offerings designed to raise “at least ¥20bn” were then paused as investors scrambled to work out what was going on.

Foreign buyers still only make up 3% of the world’s second-largest debt market, says Chris Flood in the Financial Times. Yet global investors and bond indexers are piling into China, where yields are far more attractive than in the West. The local ten-year government bond yields 3.3%, compared with 0.9% for the equivalent US Treasury. Yet pricing risk is a headache: it is hard to predict how the authorities will respond when one of their own firms gets into trouble. Investors joke that “they will soon have to read tea leaves to decide which bonds to buy”, says Logan Wright of Rhodium Group.

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