Defaults Throw Wrench in China’s $3 Trillion Company Bond Engine

  • May onshore note issuance down 57% from same period in March
  • If companies ‘can’t get the money,’ more will default: Liu

Defaults and pulled sales are starting to gum up China’s bond refinancing machine.

Chinese companies issued 382.7 billion yuan ($58.5 billion) of notes onshore this month, down 11 percent from the same period in April and 57 percent March, data compiled by Bloomberg show. With just eight trading days to go, fundraising may fall short of the record 547.3 billion yuan of debt due. That would mark a shift after sales were 83 percent more than maturities in April and almost three times higher in March.

The faltering $3 trillion corporate bond market will test Premier Li Keqiang’s determination to weed out zombie companies dragging on growth in the world’s second-biggest economy. At least 10 issuers have reneged on onshore debt obligations this year, while 153 Chinese firms have pulled 175 billion yuan of domestic sales this quarter. Shandong Iron & Steel Group Co., which canceled a 3 billion yuan bond offering on May 4, has 3 billion yuan of securities due this month and 30 billion yuan to repay this year.

“Many Chinese companies are relying on new borrowings to repay their old debt,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “If they can’t get the money they need, more will default.”

Refinancing Needs

Three calls to Shandong Iron & Steel Group, which has a AAA rating, went unanswered.

Debt-laden companies are struggling to lock in stable, longer-term financing. Sales of onshore bonds maturing in one year or less accounted for 72 percent of issuance by Chinese coal and steel producers from May 2015 to April 2016, as many were unable to sell longer debt, according to Fitch Ratings. Most of the proceeds were used to refinance maturing notes, Fitch wrote in a May 13 report.

“Only the best companies, which have strong profitability or trustworthy credit profiles, are able to sell bonds,” said Qiu Xinhong, a Shenzhen-based money manager at First State Cinda Fund Management Co., which oversees 11 billion yuan. “Confidence won’t rebound in the short term."

Higher Costs

Those able to sell bonds this month had to offer a hefty yield premium. Shanxi Luan Mining Group Co., a AAA rated coal miner in Shanxi province, sold 1.5 billion yuan of five-year notes with a coupon of 6.8 percent on May 9, before 2 billion yuan of securities come due on May 22. The yield was 319 basis points higher than the average on similar-rated debt in the secondary market.

“It’s been more and more difficult for lower-rated issuers or issuers facing overcapacity problems to refinance in the bond market,” analysts led by Xu Hanfei at Guotai Junan Securities Co. wrote in a report Friday. “Pressure on Chinese companies’ credit fundamentals is increasing.”

Declines in the market eased a bit this month amid signs of support from policy makers, with the yield premium on five-year AAA rated corporate bonds over similar-maturity government securities narrowing 26 basis points from a six-month high of 100 in April.

The government intervened to tell some debtors of China Railway Materials Co. to repay obligations after its bond trading halt triggered a selloff, people familiar with the matter said earlier this month. The State-Owned Assets Supervision & Administration Commission held a meeting last week with companies that owe debt to China Railway Materials and asked them to make the payment as soon as possible, said the people.

China has "got a situation which is moving fast," Gordon Chang, the author of The Coming Collapse of China, said in a conference in Hong Kong Tuesday. "Companies are not able to borrow because, for instance, there are lots bond cancellations lately. So this is not a good story.”

— With assistance by Judy Chen

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