Chinese corporate bond defaults to rise in 2020, as regulators’ tolerance grows, Moody’s says

Chinese corporate bond defaults are likely to tick up in 2020, while overall credit conditions for the country’s non-financial companies will be negative in the next 12 months, rating agency Moody’s Investor Service said.

The number of new onshore bond issuers who fail to meet repayment obligations could increase to as many as 50 next year from this year’s 35, with the total amount of principal involved approaching 200 billion yuan (US$28 billion), from about 100 billion yuan this year, Ivan Chung, the head of Greater China credit research and analysis at the agency, said on Wednesday.

Chinese regulators, who in 2014 shattered a long-held market perception that they would bail out any repayment failures, are now likely to tolerate an increase in defaults, as they seek to let the market play a bigger role in discerning risk. The defaults will still make up less than 1 per cent of China’s outstanding 20 trillion yuan onshore bonds, Chung said.

“I believe 1 per cent can be tolerated by the regulators, as long as the defaults are isolated,” he said. “The regulators’ intention is to reduce moral hazard [by allowing more defaults], but at the same time to make sure it won’t undermine social and economic stability.”

Chinese companies in most sectors will suffer a slowdown in revenue growth and contraction in profit margins next year, as the country’s economic growth continues to decelerate from its slowest pace in nearly three decades recorded earlier this year, Moody’s said in a new report.

The US-China trade war, which has dragged on for about two years, has dampened investment and consumption in China, and impeded Beijing’s efforts to cut debt among state-owned and private companies.