China’s Debt Defaults Are Picking Up Again

Stephen Roach: Coronavirus Fallout Could Trigger Global Recession
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Investors have blindly, willfully, gleefully believed for far too long that, for some reason, any reason, there-must-be-a-reason, state-backing-reasons, Chinese companies are just unable to go bankrupt, and that China, as a country, for some reason, any reason, there-must-be-a-reason, state-backing-reasons, China’s financial system can not crack.

Not so fast Bloomberg Reports (Washington Post full article):

Chinese companies are facing a reality check after years of ramping up debt. A de-leveraging campaign that President Xi Jinping began in 2016 to curb risks in financial markets has led to a crackdown on unregulated lending — so-called shadow banking — and tighter rules on asset management. That made it harder for some to raise funds to repay existing debt, leading to a record number of bond defaults in 2018 and 2019 as economic growth slowed. Now there’s the added risk from the spread of the deadly coronavirus, which is casting a shadow on the credit prospects of Chinese firms. Contrary to what many investors thought, state-owned borrowers can’t count on a bailout.

1. How big is the problem?

Big, with the potential to worsen, particularly as the coronavirus has shut down a large part of businesses, with transportation, tourism and consumption particularly hard hit. Onshore company bond defaults in 2019 reached more than 150 — well past the 2018 record of 120. Missed payments totaled more than 130 billion yuan ($18.7 billion), compared with 2018’s high of 122 billion yuan, which itself was more than quadruple the level in 2017. Private-sector firms accounted for more than 80% of defaults in 2019, data compiled by Bloomberg show. Moody’s Investors Service said it expects 40 to 50 new, first-time defaulters in 2020; there were about three dozen in 2019 […]

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