China set for record defaults, and downgrades tip more pain

China is zooming to a record year of corporate—bond defaults, with the 2018 total already more than three-quarters of the previous high even before an expected economic slowdown bites.
 

Chinese companies have reneged on about 16.5 bn yuan ($2.5 billion) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen in all of 2016, according to data compiled by Bloomberg. Strains are set to get worse if the trends of credit-rating companies are anything to go by—agencies including Dagong Global Rating. have been downgrading firms by an unprecedented margin.
 

“Corporate profits have worsened this year and are unlikely to improve against the backdrop of an economic slowdown,” Li Shi, general manager of the rating and bond—research department at China Chengxin International Credit Rating. “Refinancing will continue to be tough as long as the crackdown on shadow banking continues.”
 

While the People’s Bank of China has made steps to support the flow of lending to companies, many private businesses lack the access to the state—dominated banking system that national behemoths enjoy, and rely on credit from securities tied to wealth—management products and other nontraditional vehicles. Rising yields are set to make refinancing maturing debt all the tougher.
 

Borrowers have missed payments on at least 20 domestic bonds so far this year, according to data compiled by Bloomberg. There was about 66.3 billion yuan of defaulted notes outstanding at the end of May, or 0.39 percent of corporate bonds outstanding, PBOC data show. While still small, that share may be poised to rise.

Dagong has reported 13 credit-rating downgrades compared with 10 upgrades so far this year, the highest such ratio on record, according to Bloomberg—compiled data. Results from Dagong peers such as China Chengxin International Credit Rating and China Lianhe Credit Rating show similar trends.
 

The silver lining is that the defaults show Chinese regulators are increasingly comfortable with allowing struggling companies to fend for themselves without official rescues.