HONG KONG (S&P Global Ratings) April 23, 2024--Slowing economic growth, government policies, and tight financing could trigger a third wave of corporate bond defaults in China after the current trough. That's according to a chartbook that S&P Global Ratings published today, titled "China Default Review 2024: Trough Before The Third Wave."
"Policies aimed at reining in excessive leverage drove the two default waves so far," said Charles Chang, Greater China Country Lead for Corporates at S&P Global Ratings. "More policies with similar aims, scale, and effects may lead to the next wave of defaults."
The policies behind the first two waves focused on overcapacity and asset management in 2018 and real estate "three red lines" in 2021.
"China's historically low default rate was normalizing toward global levels. But that's reversing as systemic concerns led to directives against bond defaults, weakening market discipline," said Mr. Chang.
According to the report, default rates are currently at a trough.
The key takeaways for 2023:
- Offshore default rates fell to 1.3% in 2023 from a 6.7% peak in 2022. In 1Q24, the default rate dropped further to a 0.3% trough.
- Onshore default rates peaked for non-property at 1.2% in 2019, and for property at 9.9% in 2022. In 1Q24, both fell to nearly zero.
- Impact of defaults reduced as average defaulter size fell to RMB6.8 billion in 2023 and RMB2.3 billion in 1Q24, from RMB9.3 billion in 2022.
- In 2023, defaults fell in most sectors except for tech services, consumers, and retail. This highlights the vulnerabilities to slowing growth.
The key takeaways for 2024 onwards
- Offshore corporate bonds due this year (US$92 billion) is less than 2023 (US$111 billion) and 2025 (US$104 billion). Local government financing vehicles (LGFVs) and consumer sectors have more due and more refinancing needs.
- Onshore corporate bonds due will peak this year at RMB8 trillion, more than 2023 (RMB5.1 trillion) and 2025 (RMB6.2 trillion), driven by LGFVs (RMB3.5 trillion), capital goods (RMB0.75 trillion), and power sectors (RMB0.74 trillion).
- Firms became even more reliant on banks in 2023. Bond issuance remains low, particularly for lower-rated firms.
- Net issuance has been consistently negative for private firms since 2021, and for weaker LGFVs since mid-2022.
This report does not constitute a rating action.
The report is available to RatingsDirect subscribers at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box at www.spglobal.com/ratings.
| China Country Lead, Corporates: | Charles Chang, Hong Kong (852) 2533-3543; charles.chang@spglobal.com |
| China Country Specialist: | Chang Li, Beijing + 86 10 6569 2705; chang.li@spglobal.com |
| Media Contacts: | Ning Ma, Hong Kong (852) 2912-3029; ning.ma@spglobal.com |
| Michelle Lei, Beijing + 86 10 6569 2961; michelle.lei@spglobal.com |
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