China faces refinancing crunch with $2.7tn of bonds bearing down

The Financial Times - Emma Dunkley and Gabriel Wildau - 29 January 2018

China’s $4tn bond market faces a refinancing challenge over the next five years as more than half of the outstanding debt matures, heightening concerns over default risk by some borrowers.

Companies, state-owned enterprises, financial institutions and sovereign borrowers — including the central government and local authorities — have $409bn of onshore and offshore bonds maturing in 2018, followed by $619bn in 2019 and $664bn in 2020, according to data provider Dealogic. The $2.7tn in maturing debt represents more than half the total amount of China’s $4tn in outstanding bond issuance, including perpetual bonds.

A test for many borrowers is that new debt will be more expensive given a higher interest rate environment.

Alex Wolf, senior emerging markets economist at Aberdeen Standard Investments, said: “If companies reissue or borrow at higher rates then it would raise overall debt servicing costs.”

Higher servicing costs are expected to weigh on some borrowers, given the scale of China’s debt binge in recent years.

In terms of how China has always handled debt and credit issues, the interesting question is whether we will see political choices to allow more state-owned enterprises to default Alex Wolf, Aberdeen Standard Investments.

Analysts at Dealogic said that “there is a reason for worry” as “the whole economy has been built on too much debt”, which “could be a [source of] pressure for the companies.”

A significant amount of short-term debt was sold in 2015 to finance corporate activity, with a large portion of this issuance maturing over the next few years, said Dealogic.

Li-Gang Liu, chief China economist at Citi Group, said: “We worry about corporate debt. State owned-enterprises are a major debtor in the Chinese economy. I do see more defaults will be allowed this year than last year.” 

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Citi said there have been 89 corporate defaults since the first case a few years ago. In 2016 there were 48 defaults, although this reduced to 33 last year, Citi said. Mr Liu added that the government is nonetheless “cautious” in allowing state-owned enterprises to default, and would not permit widespread defaults.

Mr Wolf added: “In terms of how China has always handled debt and credit issues, the interesting question is whether we will see political choices to allow more state-owned enterprises to default.”

Bond defaults have been rare in China’s onshore corporate bond market until recently, with the government often intervening to bail out troubled issuers. The first onshore corporate bond default occurred in March 2014, after privately owned Chaori Solar missed an interest payment.

Baoding Tianwei, a power equipment manufacturer, became the first SOE to default in 2015. The default led analysts to suggest this was a sign that the Chinese government was more willing to let market forces take precedence.

Some market commentators believe the refinancing does not pose a significant risk. Analysts at Moody’s, which only rates offshore Chinese bonds, said earlier this week that “the debt maturity and subsequent refinancing needs of Asian corporates” this year will “be manageable”.

They said that “the buoyant bond market” last year allowed many Asian companies to issue debt for refinancing. They added that 2017 saw the “all-time strongest rated issuance level for Asia”.