Bond defaults will force a needed repricing of risk in China’s credit market
- The sheer volume of debt going bad, particularly involving state-owned enterprises, signals that the government is taking a more market-based approach
- In the longer run, this will encourage greater fiscal discipline and force markets to reflect the true risks, improving transparency in the world’s second-largest bond market
Credit markets tend to perform well at the beginning of economic cycles, when businesses are growing, earnings prospects are rising and the tide of bad debts from the last cycle have been cleared. The good performance of corporate bonds globally in November serves as proof of this trend.
This is not the first time defaults have occurred. This year’s figure of 164 billion yuan (US$25 billion) is just above the 151 billion yuan recorded in both 2019 and 2018.
In fact, China bond default figures have gone up steadily in the past three years. From 2014 to 2017, the total value of state-owned and private-sector corporate defaults was 95 billion yuan, or just under 60 per cent of the figure in this year alone.
The sheer volume of debt going bad in the past few years illustrates how the local authorities and China’s government may be shifting towards a more market-based approach and wishing to instil greater fiscal discipline, given rising levels of debt over the past decade.
