Chinese Corporate Defaults Reach Record

Beijing vows better handling, transparency going forward

A Chinese bank employee counts 100-yuan notes and US dollar bills at a bank counter in Nantong in China's eastern Jiangsu province on Aug. 28, 2019. (STR/AFP/Getty Images)

News Analysis

Chinese corporate bond defaults reached a record this year.

After decades of zero defaults, China has slowly been letting companies default on their debts. Chinese companies have binged on debt for too long and regulators can no longer afford to bail out every defaulting company.

Onshore (yuan-denominated) bond defaults reached nearly 130 billion yuan ($19 billion) by the last week of December, according to Bloomberg data. That breaks the previous record of 122 billion yuan in 2018.

The recent spate of missed interest payments and principal repayments has raised worries about the inability to refinance. It has also called into question the central government’s ability and willingness to prop up ailing companies and manage financial market stability.

While the Chinese Communist Party (CCP) has become more willing to allow companies to default, the speed and volume of recent defaults has unnerved regulators.

The way that Beijing implements elements of a market-based system is often haphazard. The process to determine which companies receive bailouts and which ones are left to default is often a black box, which is a major risk to prospective bond investors.

Even when firms are bailed out or are granted a payment extension, terms often are negotiated in private with major debt holders; that leaves other bond investors in the dark.

To address some of these concerns, senior regulatory bodies, including the China Securities Regulatory Commission, officials from the People’s Bank of China, and other high-level authorities, discussed the topic of bond defaults and the mechanism for settling debts, according to a statement posted on the website of the central bank on Dec. 27.

The statement—which is open for public comment—signals that the CCP is open to more transparency in how it handles bond defaults and, in turn, restores some investor confidence.

Major Defaults or Near-Defaults

Several major Chinese companies have narrowly avoided defaults recently.

On Dec. 23, bondholders of Peking University Founder Group agreed to a payment extension on 2 billion yuan of debt ($290 million). The technology firm, which is majority-owned by Peking University, defaulted on the bonds earlier this month.

The payment extension lasts until Feb. 21, 2020. As part of the agreement, Founder Group will continue to pay interest and has pledged shares it owns in Bank of Chongqing as collateral.

The agreement came at a critical time. Due to the terms of the bond, if Founder Group didn’t pay or reach a deal by Dec. 23, it would automatically trigger a cross-default on Founder Group’s dollar-denominated offshore bonds. That was a situation the company didn’t want.

Struggling conglomerate HNA Group Co. was able to make a 1.3 billion yuan ($190 million) bond payment on Dec. 24, narrowly avoiding default on a loan, Chinese financial magazine Caixin reported, citing insiders.

Once the face of China’s debt-fueled global spending spree, with holdings in Deutsche Bank and Hilton Worldwide, HNA had been mired in debt and controversy in recent years.

Shandong Ruyi, a Chinese conglomerate of luxury brands that include Aquascutum and Bally, narrowly averted a default on a $345 million bond due Dec. 19. On Dec. 12, credit rating agency Moody downgraded Ruyi’s corporate credit rating from B3 to Caa1, which occurred after S&P withdrew its rating of the company the previous week.

Earlier this month, major Chinese commodities trader Tewoo Group defaulted on its U.S. dollar-denominated bonds, becoming the biggest default by a Chinese state-owned enterprise since 1998. The default came as a shock to investors, as Tewoo is backed by the government of the City of Tianjin and had the support of CCP authorities.

In general, investors with dollar-denominated Chinese bonds should be safer, relative to yuan-denominated bonds. The Financial Times recently reported that defaults on offshore dollar bonds reached $2.9 billion in 2019.

Dollar bond default data has been a closely guarded secret for the CCP, mainly because there’s a higher level of implicit state guarantees. The offshore (dollar) bond market is a critical funding source for Chinese companies, and Beijing is keen to uphold investor confidence.

But given the level of debt some companies have operated with and the shocking default of Tewoo, dealing in Chinese bonds—even dollar ones—is becoming a riskier trade.