Rise seen in bond defaults in 2018

By Ma Jingjing Source:Global Times Published: 2018/5/14 21:18:39

Process can help root out risks: experts

An employee arranges the display at a Fuguiniao store in Quanzhou, East China's Fujian Province. Photo: VCG

Tighter liquidity and the macroeconomic situation jointly contributed to an increase in the number of bond defaults this year, but experts said the defaults can help in exposing risks and promoting resource allocation.

By the end of April 2018, more than 10 companies from various industries had defaulted on 15 batches of bonds worth over 12.86 billion yuan ($2 billion), up 25 percent and 33.58 percent year-on-year, respectively, according to a bond market risk report China Central Depository & Clearing Co released on Friday.

The companies included Sichuan Coal Industry Group, Dalian Machine Tools Group and Evergreen Holding Group. Quanzhou-based Fuguiniao Co, which is listed on the Shanghai Stock Exchange, saw its first bond default in April.

The main factors contributing to these bond defaults were banks' tight liquidity and weak profits for companies in traditional sectors, according to industry experts.

"In 2015 and 2016, when interest rates were low, domestic companies issued bonds. Since 2017, commercial banks' liquidity has been tightening and traditional enterprises have become less profitable. As a result, many can't repay the bonds," an industry insider who only gave his surname as Liu told the Global Times on Monday.

Amid the nation's deleveraging efforts, commercial banks have been contracting their overall credit loans, while newly published regulations for the asset management sector also restricted capital flows into the bond market, said Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology.

In April, China's entrusted loans were at a low level, dropping 157.5 billion yuan in total, data from the People's Bank of China, the country's central bank, showed on Friday.

The rise in bond defaults is not necessarily a bad thing, Dong told the Global Times on Monday. "Some companies used to issue new bonds to fund maturing liabilities, covering up potential risks. However, bond defaults expose those risks, and this can promote efficient resource allocation and squeeze the inferior players out of the market in the long run."

Dong said he predicted bond defaults would continue this year, considering the large amount of maturing bonds, ongoing structural deleveraging and corporations' fund pressure.

Difficult issuance

Now it is harder for companies to issue bonds, as many investors are unwilling to buy them, according to Liu. "Two years ago, the interest rate on bonds rated AA was about 5 to 6 percent, but it is over 7 percent now," he said. In China, credit ratings often cluster in two rating classes - AAA and AA - with the former at a higher level.

Since the start of May 2018, the issuance of 32 batches of bonds, worth 19.55 billion yuan, has been delayed or canceled, domestic news site stcn.com reported on Monday, citing data from financial information provider Wind. So far this year, the issuance of more than 300 batches of bonds worth nearly 182 billion yuan has been canceled.

Fund firms are more cautious about buying bonds, Liu said. "The industrial cycle and credit ratings are the main elements fund managers consider, and they tend to buy bonds issued by State-owned enterprises with high ratings."

Posted in: ECONOMY

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