China launches countrywide bonds health check as default wave looms
- Authorities to check size of liabilities, use of proceeds and progress of projects funded by proceeds
China’s National Development and Reform Commission, which oversees bond issuance by its biggest state-owned enterprises as well as some large property companies, has launched a countrywide inspection campaign to better assess risks, as more companies run into trouble repaying their debt amid a slowing economy.
According to a notice published on its website on Wednesday, provincial level authorities under the NDRC will inspect corporate bonds under duration and check the size of their liabilities, the use of proceeds and progress of projects funded by these proceeds.
“On-site meetings and conference calls are encouraged between different regional agencies, for experience exchange, to better prevent risk and manage situations of default,” the commission said.
Bonds approved by the commission are called enterprise bonds. The NDRC also controls offshore bond issuance by all Chinese companies.
Easy credit has fuelled aggressive fundraising and investment by Chinese companies over the past few years, but many are facing a liquidity crunch since last year, after Beijing launched a campaign to reduce debt and avoid systemic risk.
More than 15 bonds worth 10.6 billion yuan have defaulted so far this year. Li Yuanwei, an analyst with Tianjin-based Bohai Securities, said in a note on Wednesday that more defaults could be in the pipeline: “Economic growth is still under pressure, while companies are facing difficulties in refinancing debt with banks tightening their belts for risk control.”
In 2018, the number of corporate bond defaults surged to 119, more than triple the 35 cases reported a year earlier. The value of defaulted bonds also tripled to 116.6 billion yuan (US$16.95 million) last year from 33.7 billion yuan in 2017, according to the data compiled by financial data provider Wind.
China’s non-financial companies face bond maturation worth 3.5 trillion yuan in the coming year. This number will grow by 36 per cent if put options are exercised, further putting pressure on companies’ cash flows, according to Bloomberg.