More China industry defaults loom as Beijing switches growth focus
Beijing's move to focus mainland economy on services coincides with rise in borrowing costs
Mainland firms will miss more debt payments in the coming year as smokestack industry losses mount on Premier Li Keqiang's plan to switch the economy's focus towards services, according to Standard & Poor's.
The yield on Anyang Iron & Steel's 2019 notes has jumped 386 basis points this quarter to 10.7 per cent after China Chengxin Securities Rating reduced its rating to AA-minus from AA in June. Industrial debt globally yields 3.4 per cent, according to Bank of America Merrill Lynch indices.
Metal producers were the worst hit as corporate downgrades in the mainland surged to 52 in the first seven months of the year, more than in the last six years combined, according to Chengxin. Mining and metal companies face 259 billion yuan (HK$328 billion) of bond payments by the end of next year just as industrial-profit growth has cooled to the least since December. That is more than the total amount due in the period on all corporate notes in Thailand, Malaysia and Singapore combined.
"The number of defaults in the corporate space will increase over the next six to 12 months," Christopher Lee, managing director of corporate ratings at S&P in Hong Kong, said in reference to payments on all financial obligations. That "would increase the risk premium for the bonds, and it could result in more selective lending and investments", he added.
The yield on top-rated corporate notes due in 10 years has risen 55 basis points this quarter to 5.68 per cent. The rate on similar-maturity government bonds climbed 55 basis points to 4.07 per cent.