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The Ticking Debt Bomb in China’s $20.5 Trillion Bond Market

Updated on January 25, 1:02 AM EST

What You Need To Know

Investors in the world’s second-largest bond market are facing a reality check.

While defaults were once considered a rare occurrence in China’s credit market — with many borrowers having relied on financial support or a bailout in times of trouble — the past three years combined have seen a record number of delinquencies. A crackdown on the indebted property sector triggered a wave of payment failures among real estate firms including China Evergrande Group.

Even builders once considered considered immune to the credit crunch are now struggling to repay their borrowings.
After years of debt-fueled spending, Chinese companies are under increasing pressure. They are trying to cope with unsustainable levels of debt and a crackdown on unregulated lending, also known as shadow banking — all against a backdrop of substantially slower economic growth compared with earlier decades.

Beijing has sought to establish a more market-led approach to risk that allows competition to weed out weaker borrowers and so-called “zombie” firms.

By The Numbers

  • $20.5 trillion Total value of China’s domestic bond market, the second largest after the US
  • $4.6 billion Total value of onshore corporate bond defaults so far in 2022
  • $26.2 billion Total value of offshore corporate bond defaults so far in 2022

Why It Matters

Beijing is has become comfortable with letting borrowers default. While that might turn investors off in the short term, that’s ultimately a good thing for the market longer term as it allows weaker firms to fail. Encouraging competition and allowing investors to more accurately price risk both help improve the efficiency of the country’s debt markets.