Ever since Beijing allowed private Chinese companies (even certain state-owned enterprises) to officially fail for the first time in 2015, and file for bankruptcy to restructure their unsustainable debt loads, it’s been a one-way street of corporate bankruptcies, one which we profiled last June in “Is It Time To Start Worrying About China’s Debt Default Avalanche” (the answer, by the way, was yes), and which culminated with a record number of Chinese onshore bond defaults in 2018, as a liquidity crunch sparked a record 119.6 billion yuan in defaults on local Chinese debt last year.
But if 2018 was bad, 2019 is set to be the biggest by far for defaults in China’s $13 trillion bond market, highlighting the widening fallout from the government’s campaign to rein in leverage and China’s accelerating economic slowdown. According to Bloomberg, in just the first four months of the year, companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds, some 3.4 times the total for the same period of 2018. The pace is also more than triple that of 2016, when defaults were more concentrated in the first half of the year, unlike 2018.
However, whereas for much of 2018 Chinese defaults affected largely less meaningful companies with little to no systemic impact, in 2019 the defaults started hitting dangerously close to the beating heart of China’s massive, $40 trillion financial system (roughly three times China’s GDP). As we reported back in February, a giant Chinese borrower missed its payment deadline when Wintime Energy – which in 2018 became the latest Chinese bond defaulter as the coal miner failed to pay scheduled interest – didn’t honor part of a restructured debt repayment plan, setting the scene for even more corporate defaults, and as Bloomberg put it, “underscoring the risks piling up in a credit market that’s witnessing the most company failures on record.”
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