Chinese Bond Defaults Seen Rising as Borrowing Costs Climb

  • All 22 people surveyed say corporate debt failures will rise
  • 72% say yield premiums on corporate notes to increase

Chinese corporate defaults will likely spread next year as borrowing costs climb, financial companies surveyed by Bloomberg said.

All 22 bond traders, analysts and others surveyed forecast China’s corporate default rate will rise in 2016, while over 70 percent expect the extra yield on corporate notes to increase. The premium on five-year AA rated company securities over government notes has risen to 173 basis points after plunging to an eight-year low of 169.2 basis points last month.

More firms in China are struggling to repay debt amid the worst economic slowdown in a quarter century. The number of listed companies with more debt than equity has jumped to 913 from 705 in 2007, according to data compiled by Bloomberg. Three Chinese manufacturers said last week that they lack funds to repay bonds due this month. Earlier in December, pig iron producer Sichuan Shengda Group Ltd. became at least the seventh Chinese firm to renege on local debt obligations this year.

“There have been quite a number of bond defaults recently and defaults will become normal in the near future,” according to a Dec. 24 research note from Hua Chuang Securities Co. written by analysts led by Qu Qing. “Investors need to watch out for companies exposed to industries in which the government is trying to cut excess capacity.”

China’s government pledged this month to offer more support for companies to upgrade technology and equipment, and reduce debt with “innovative financial policies.”

Undervalued property-related bonds sold in China’s domestic market will be a good bet in the coming year, 50 percent of the respondents said. Some 23 percent said bonds from overcapacity industries can offer good value in 2016 and another 23 percent prefer notes from small- and medium- enterprises.

Most of the respondents see the highest risks in companies in the coal and steel sectors. Sinosteel Co., a state-owned steel trader, earlier this month postponed a bond payment a third time. Winsway Enterprises Holdings Ltd., the Chinese coking-coal importer, missed interest payment for the second time in October on a debenture due 2016. Coal miner Hidili Industry International Development Ltd. didn’t repay dollar-denominated bonds due Nov. 4.

Chinese investors are predicting a record-long rally in bonds will end before mid-2016 and debt securities will trail behind stocks the economy stabilizes. Fifteen of 22 fixed-income traders and analysts surveyed by Bloomberg said the rally of eight consecutive quarters will end before June 30.

China Securities Co. expects more defaults among both the private-sector and state-owned enterprises, according to a Dec. 22 research note from the brokerage.

“Preventing financial risk will likely be a very important policy goal in 2016,” the note said. “Yet as the government works to reduce overcapacity, there will inevitably be rising risk for the financial market.”

— With assistance by Laura Yin, Yuling Yang, Xize Kang, Lianting Tu, and Ling Zeng

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