Photographer: Johannes Eisele/AFP via Getty Images

A Default Storm Is Brewing Over China Junk Bonds

  • A record amount of bonds rated AA or lower will mature in 2017
  • Net note sales turn negative in December, lowest on record

A default storm is brewing for China’s lower-rated corporate bonds with a record amount maturing just as borrowing costs surge.

Regulators are curbing leverage, pushing up the cost of capital and adding to challenges for weaker borrowers, according to China Citic Bank Corp., a unit of the nation’s largest investment conglomerate. On Jan. 16 alone, two companies missed payments. About 29 notes defaulted last year, up from seven in 2015.

“Bond issuers are facing huge redemption pressure,” said Meng Xiangjuan, an analyst at Shenwan Hongyuan Group Co. in Shanghai. “Investors should watch out for risks.”

About 211 billion yuan ($31 billion) of company notes rated AA or lower, often considered junk in the onshore market, will mature in 2017, up from 155 billion yuan last year, according to Bloomberg data. Bond issuance in December by Chinese firms plunged to 205 billion yuan less than the amount of notes they had to repay that month, the lowest on record, central bank data show.

The following three charts illustrate how credit risks are converging.

The first chart shows rising junk debt falling due in the onshore market. Firms must repay 321.9 billion yuan next year and 387 billion yuan in 2019.

Rising borrowing costs are deterring companies from selling bonds. The likelihood of an "explosion" of credit events will increase if issuance of debt continues to trail maturities, China International Capital Corp. analysts Yi Huan and Liang Hong wrote in a report on Jan. 16.

The final chart shows the yield premium of five-year AA- rated corporate bonds over government notes is widening. The gap was 302.5 basis points on Thursday, compared with 258 basis points at the end of September, according to Chinabond.

— With assistance by Shuqin Ding, Ling Zeng, and Judy Chen

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