Delinquencies have already started rising after a remarkably quiet second quarter, and pressure on borrowers is set to grow as 3.65 trillion yuan ($529 billion) of notes mature by year-end
With the economy now strong enough for policy makers to dial back financial support but still too weak to save the most distressed borrowers, some fund managers are bracing for defaults on domestic Chinese debt to hit record highs this year. .
While few see a crisis in the offing, debt specialists at SC Lowy and Adamas Asset Management are becoming more selective in China, arguing that the government-induced calm in local credit markets is unlikely to last. Analysts say non-state companies, lower-rated developers and some local government financing vehicles are particularly vulnerable as borrowing costs climb and refinancing becomes more difficult.
“The government has neither the firepower nor the will to backstop it all,” said Brock Silvers, chief investment officer at Adamas Asset Management in Hong Kong, adding that he expects onshore defaults in China to reach a new annual record. That would mean another 72.2 billion yuan of delinquencies by the end of December, according to data compiled Bloomberg.
Local defaults so far this year have been strikingly rare, considering that the Covid-19 pandemic plunged China’s economy into its worst contraction in decades during the first quarter. Onshore delinquencies fell 17% in the first half to 49 billion yuan, in part because the government encouraged lenders to refinance debt, accept payment delays, or find other solutions such as swapping bonds for fresh notes with longer maturities.
Authorities’ outsized focus on avoiding defaults now appears to be easing as the economy bottoms out and the threat of market contagion wanes, a policy stance that aligns with the government’s long-term goal of improving the financial system’s pricing of risk. Chinese companies reneged on 10.4 billion yuan of notes in July and about the same amount so far in August, with luxury home developer Tahoe Group Co. among the latest to miss payments.
“We have seen a somewhat illusory improvement in ‘defaults’ this year, but drilling deeper the picture is less comforting,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd. in Singapore.
Gallimore predicts China’s onshore bond market will catch up with the trend offshore, where defaults on dollar debt tracked by Bloomberg have already exceeded last year’s total by 55%. He said funding stress will likely be concentrated in non-state borrowers and may impact more property firms, which account for the bulk of China’s high-yield bond issuance.
The nation’s developers need to refinance or repay 199.3 billion yuan of onshore debt and $12.3 billion of offshore notes before year-end, data compiled by Bloomberg show. And they’ll have to come up with the cash while also adhering to issuance guidelines introduced this month that restrict the size of bond offerings by property companies in China’s interbank market to 85% of outstanding debt coming due.
Even as authorities grow more tolerant of defaults, they’re unlikely to turn off the…
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