FxWirePro: Record corporate defaults hit China as economy cools

As the economy cools since last year, China has been hit by record corporate defaults.

One of the top three rating agencies, Fitch has been warning on China’s corporate defaults since last year. As 25 Chinese corporate issuers had defaulted on payments for 52 onshore bonds worth a total of 60.6 billion yuan (S$12.1 billion) by the end of the third quarter, Fitch warned that the corporate bond defaults are likely to continue rising next year due to daunting refinancing costs, with defaults expected to concentrate on the country's cash-starved private sector. In addition to the tightening financial conditions, the United States’ tougher stance on trade imbalance with China has finally started taking a sizable toll on China’s private sectors. However, the onshore default rates declined to 0.23 percent in H1 2018 from 0.37 percent in 2017 and record 0.66 percent in 2016. Fitch warned that despite this decline, the defaults could be higher in 2018 than 2017.

It seems that Fitch was right on its expectation. Forty-five Chinese businesses defaulted on 117 bonds with a principal amount of 110.5 billion yuan ($16.3 billion). Both figures are new records. As defaults rose, concerns are also growing over the economic slowdown. According to this week’s data, China’s economy grew 6.6 percent in 2018, the weakest pace since the 1990s.

If Fitch is right about rising defaults, 2019 is unlikely to be pretty for the world’s second-largest economy.