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Bondholders Aren’t Getting Paid Again In China

Make Chinese borrowers default again.

China better get moving on more macro-prudential policy tweaks, fiscal stimulus and, perhaps most importantly, efforts to unclog the monetary policy transmission channel, because at least two companies have missed bond payments this month.

China Minsheng Investment and Wintime Energy each let deadlines come and go on February 1 and February 6, respectively, drawing a bright led line under concerns that easing measures are not working their way through fast enough at a time when a decelerating economy and vestiges of the deleveraging campaign are weighing on borrowers.

Wintime is a familiar name, having defaulted last year. Apparently, they’re telling folks that the company is still looking around for financing when it comes to repaying 20% of the principal on a 3.8 billion yuan bond.

Meanwhile, China Minsheng Investment failed to pay a 3 billion yuan bond that matured late last month. On January 29, they told investors the money would be there in three days, but as Bloomberg dryly notes, “that didn’t happen”.

“If China Minsheng ends up defaulting, it may rank alongside Wintime as one of China’s biggest failures, with 232 billion yuan ($34.3 billion) of debt as of June 30”, Bloomberg goes on to say, in the same linked article.

As a reminder, last year saw 38 domestic bond defaults in China, more than double the previous record (set in 2016). Here’s a chart from Goldman which shows you Wintime in context:

ChinaDefautsGS

(Goldman)

For their part, Goldman doesn’t see the trend in onshore defaults as indicative of worsening leverage ratios (at least not broadly). Rather, the bank notes that “the main contributing factor is financial sector reforms, in particular the curbing of shadow banking activities [which] led to tighter domestic credit conditions” making it “increasingly challenging for over-levered entities to refinance their maturing debt obligations.”

Meanwhile, expectations of slowing growth going forward (a featured commentary in Economic Information Daily on Monday said GDP is expected to decelerate to 6.3% in 2019) means credit metrics are unlikely to improve, which should mean default rates remain elevated.

Clearly, privately-owned enterprises are at the heart of the problem, which explains why Beijing has gone out of its way to roll out new measures to support POEs facing refi challenges.

“The vast majority of onshore defaults were by non-SOEs [in 2018], which accounted for 86.7% of defaults by issuer count and 90% by principal amount”, Fitch wrote last month.

DefaultsFitch

(Fitch)

Goldman breaks things down a bit further. “The pick-up in defaults during 2018 was concentrated amongst POEs, as we estimate that only 6 of the 38 defaults last year were issued by central or regional state-owned enterprises”, the bank writes, in the same note cited above, adding that “the overall default picture is much worse amongst POEs, as we estimate that the amount of POE bonds that defaulted last year equated to 4.6% of all POE bonds outstanding at the start of 2018; for SOEs this was 0.1%.”

Still, as you can see from the following monthly breakdown, SOE defaults are seemingly becoming more frequent.

DefaultsGSChina2

(Goldman)

In any event, with a murky economic outlook and an even murkier resolution process for onshore defaults, you can expect this story to keep popping up on your radar screen. There’s no obvious way for China to quickly slam the brakes on this trend without halting the deleveraging campaign in its tracks (i.e., letting the shadow banking complex loose again).

On the bright side, China optimists sometimes characterize defaults as a sign that Beijing is allowing for an orderly transition towards a more market-based financial system where economic reality is allowed to assert itself without the heavy hand of the state slapping the invisible hand of the market. That’s likely to be small comfort if/when the defaults start piling up, though.


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