The US designations lay the groundwork for financial sanctions against these Chinese entities, forcing investors to weigh the choice of making money from China’s corporate bond market against the prospect of bond issuers being penalised by the US and suffering reputational damage, analysts said.

“If the US decides to block top Chinese corporates from dollar financings, then everyone will simply have to stop trading their bonds the very next day,” said Vivien Gui, who is in charge of fixed income investment at Wu Capital. “China hasn’t reached this kind of stage yet, but some traders are already asking what would be the point of buying some corporate bonds now?”

But China’s US dollar corporate bond market is under mounting pressure, with prices declining and some investors continuing to sell in anticipation of an escalation of US-China tensions.

For example, a US$900 million bond with a 3.875 per cent interest rate – sold by CNAC (HK) Finbridge Company, a subsidiary of ChemChina and due in June 2029 – is trading 6 per cent below its peak price reached in August.

Huawei Investment and Holdings’ US$1 billion 4.125 per cent bond, due in May 2025, is down 5 per cent from its peak in March.

Sinochem International Development’s US$300 million 3.125 per cent bond, due in July 2022, is also trading below its May peak price.

The Pentagon’s designations do not automatically trigger US sanctions, but US law says the president may declare a national emergency that would allow him to penalise any companies on the list that operate in the United States.

These firms could join a growing list of Chinese entities put on the US Treasury Department’s Specially Designated Nationals list, which is compiled in coordination with the US State Department. As a result, the assets of the entities and individuals falling under US jurisdiction could be frozen, and US residents would generally be barred from dealing with them.

The US State Department blacklisted six Chinese entities and two Chinese men this week for having dealt with Iranian shipping company Islamic Republic of Iran Shipping Lines.

Technology companies, banks and state-owned enterprises are key targets for US sanctions, affecting the price of their bonds in the Chinese corporate bond market, according to Hua Cheng, research analyst for corporate credit at AllianceBernstein.

“Because US-China tensions may escalate in the run-up to the US elections on November 3, we think caution is warranted,” Hua said. “The US regards China’s [state firms] with suspicion because of apparent links some have to the Chinese military.”

Given the growing mountain of debt of many Chinese firms, it is unclear how many of them Beijing is willing to save if they are cut off from their financing channels, despite their strategic economic importance, analysts said.

Issuance of US dollar bonds by Chinese firms surged 146 per cent to US$123 billion in the five years to 2019, according to Refinitiv data.

“The question is whether central bank intervention is delaying loan losses and balance sheet pressures on the private sector,” Johanna Chua, head of Asia-Pacific economics and market analysis at Citigroup Global Markets Asia, said at the Debtwire Asia-Pacific Distressed Debt Forum last week.

“Restructuring may, at some point, have to be part of the solution, once debt continues to go to a point of no return,” she said.

Sophia Xia, co-head of China restructuring at Houlihan Lokey, expects China’s corporate bond defaults to rise as companies are unable to obtain funding to keep rolling over their debt while their profits are hit by a slow recovery in their business.

“I think the government realises that it is no longer able to sustain economic growth by issuing more debt,” Xia said. “If you think your company’s fundamentals can no longer withstand a high leverage ratio, then that is like a tumour. If the tumour expands, then you should have surgery. Actually, a default is not that scary.”