Chinese corporate bond defaults to surge to a record high in 2020 as government rescue is no longer guaranteed, says Fitch
- The number of new onshore issuers who fail to repay debt could rise to up to 60 next year from 51 in the first 11 months this year, according to Fitch
Corporate bond defaults in China will reach a record high next year, with Beijing unlikely to come to the rescue of struggling companies, according to Fitch Ratings.
The number of new onshore issuers who fail to repay debt could rise to up to 60 next year from 51 in the first 11 months this year, with the default rate jumping to 1.3 per cent, the ratings agency said. Moody’s, however, said last month that it expects new issuers who fail to meet repayment obligations to rise to as many as 50 next year.
“We see 60 per cent of companies with debt due in the next 12 months do not have enough cash to repay their debt,” said Jenny Huang, director of China corporate research at Fitch. “Banks may cut some slack and extend the repayment date of loans to private companies, but will not save them from offering new financing to pay their debt.”
China’s tsunami of bond defaults topped US$17 billion since November, poised to break last year’s record amid tepid growth
Hohhot Economic & Technological Development Zone Investment Development Group, a local government financing vehicle from the Inner Mongolia autonomous region, overshot a December 6 deadline to service its bond. Local media reported that the company repaid 565 million yuan (US$80.2 million) of principal and 68 million yuan interest on its 1 billion yuan note on Monday.
State-owned commodities trader Tewoo Group on Monday proposed an unprecedented debt restructuring plan as it struggled to service a US dollar bond, while a string of private companies based in the eastern province of Shandong are also facing similar pressure with their domestic bonds.
Since 2014, the principal amount involved in China’s onshore corporate bond defaults has risen nearly 100 times by the end of November this year. The defaulted principal amount surged to 99.4 billion yuan by 51 corporate in the first 11 months of the year compared to 1.3 billion yuan by five issuers five years ago.
“The actual default figure is even higher if we count those off-court payments chosen by companies that do not want to be tagged as defaulters,” said Huang.
Last month, Moody’s said that 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. It rated the credit conditions for China’s non-financial companies as negative in the next 12 months.
China’s gross domestic product slowed to 6 per cent in the third quarter – the weakest pace in more than 27 years, while economists expect growth to slow below 6 per cent next year.
“Things will get much worse before getting better,” economists at investment bank Macquarie said in a research note last week.