Onshore bond defaults up in 2019

Asset Class in Focus

The trade dispute and slowing GDP growth are putting additional pressure on domestic corporates with loan payments due.

In the first half, 100 domestic companies in China have defaulted (as of 30 June), a surge from the corresponding period in 2018 when the figure was 32, according to data provider Wind.

The latest one (27 April) is China’s CITIC Guoan Group. It defaulted on a bond worth RMB 3bn($426m) and did not pay a bond coupon of RMB 195m, according to an S&P report.

Manufacturing companies have been leading the non-payers in the first half. According to Wind’s categorisation, “manufacturing” had the highest number with 33 defaults. “Wholesale and retail” comes second with 12, followed by “miscellaneous”, with 10.

“Increasing refinancing pressure, greater government tolerance of defaults, sluggish manufacturing and industrial sector growth and weaker investor sentiment amid US-China trade tension re-escalation will likely push defaults rates higher,” said a Fitch Ratings spokeswoman in May.

The first half number of defaults are on track to exceed the 178 for the full year 2018.

China’s record-high RMB 84.3bn ($12.53bn) of onshore bond defaults in 2018 were driven mainly by companies’ poor liquidity. Nearly all (96%) of the companies had insufficient cash to cover their short-term debt (bonds and bank loans maturing in less than one year). And for 63% of the companies, short-term debt accounted for more than half of their total debt, noted Moody’s, FSA previously reported.

Foreign firms like BNPP Asset Management are also cautious on domestic corporate bonds.

“On the onshore side, we expect some additional spread widening, which means more defaults,” Jean Charles Sambor, the firm’s London-based deputy head for emerging market fixed income, told FSA earlier.

“That is why we are really not active in the Chinese onshore market on the corporate side.”

Offshore bonds attractive

Offshore China high yield is a different story,  Sambor noted. He believes that offshore high yield bonds offer the same credit risk as US high yield, but with better valuations.

“China high yield is very cheap compared to US and even global high yield.”

He particularly likes the offshore high yield bonds of property developers because the sector is expected to be resilient against the trade tensions between the US and China.

Other fund managers have also warmed to Chinese property issuers, including Insight Investment and Allianz Global Investors.

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