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Onshore defaults lower in Q1

Despite the coronavirus, China's onshore defaults were lower year-on-year in the first quarter.

In the first quarter of this year, 50 domestic bonds in China have defaulted (as of 31 March), compared with the corresponding period in 2019 when the figure was 68, according to data provider Wind.

A key reason is that China has taking action to boost market liquidity, Shanghai-based Shuncheng Zhang, associate director for Fitch Ratings, told FSA.

For example, in March authorities changed domestic bond issuance to a registration system from an approval system, effectively allowing companies to refinance their existing bonds.

“This move simplified the procedure to issue bonds. Previously, it could take several months but now weeks or even a shorter time could be enough, which backs up the bond market liquidity,” he added.

“Even though the onshore bond market was influenced by the coronavirus in the first quarter, there has been a 30% increase of corporate bonds’ issue size compared with the corresponding period in 2019,” he said.

More defaults allowed

Zhang believes that over the long-term, the government will allow onshore default figures to gradually increase.

“The reason for the increase is that the regulators want to increase bond market capacity and also the percentage of companies’ bond financing.

“To increase the market capacity, the regulators need to lower the threshold for companies to issue bonds, including those which do not have good credit quality. Thus, this move will increase the default risk.

Moreover, regulators want a higher percentage of companies to raise money through bond issuance to avoid over-dependence on bank financing, Zhang added.

Authorities will attempt to control bond defaults through selective intervention, he added. “Some local governments would intervene to help companies, both state-owned and private, to avoid defaults.”

Foreign investors

For the full year 2019, 231 domestic bonds in the mainland defaulted, with a total default figure of RMB 146.6bn ($20.7bn), according to Wind.

But China’s onshore bond defaults and policies have little influence on foreign investors because they account for less than 2% of investment in the onshore market, he said. Moreover, foreign investors focus on China’s government bonds instead of corporate bonds.

Onshore corporate bonds are not included in the world’s major indexes and foreign investors may not believe in corporate bonds, perceiving the companies issuing them as non-transparent, he added.

In the first quarter of this year, Peking University Founder Group had the largest issue size of RMB 4.19bn and did not pay a bond coupon of RMB 98.15m.

The latest default occurred on 30 March, is Anhui Foreign Economic Construction Group. The issue size is RMB 500m and it did not pay a bond coupon of RMB 36.08m, according to Wind data.

Top three onshore bond defaults Q1 2020

Issue’s name Default date Issue Size (RMB) Overdue Interest of Default Bonds (RMB)
Peking University Founder Group 19-Feb 4.19bn 98.15m
Cefc Shanghai International Group 12-Feb 2.5bn 197m
Kangmei Pharmaceutical Company 3-Feb 2.4bn 127.9m
Source: Wind

Top three onshore bond defaults Q1 2019

Issue’s name Default date Issue Size (RMB) Overdue Interest of Default Bonds (RMB)
China Minsheng Investment Group 29-Jan 3bn 156m
China City Construction Holding Group 1-Mar 1.8bn 71.46m
Neoglory Co 18-Mar 1.5bn 96.8m
Source: Wind

Part of the Mark Allen Group.